-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sp93r0P8z2wei1oiV1e0//pwSxmh6ZvY1kgavyVKDx3LBXldk5A7RWyif9B/1Nqh YJKuF5yRIV35lsVsw0Txrw== 0000950148-97-000788.txt : 19970401 0000950148-97-000788.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950148-97-000788 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFICAMERICA MONEY CENTER INC CENTRAL INDEX KEY: 0000921623 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954465729 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20897 FILM NUMBER: 97570622 BUSINESS ADDRESS: STREET 1: 21031 VENTURA BLVD SUITE 102 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 BUSINESS PHONE: 8189928999 MAIL ADDRESS: STREET 1: 21031 VENTURA BLVD SUITE 102 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC UNITED GROUP INC DATE OF NAME CHANGE: 19940413 10-K405 1 FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K THE SECURITIES EXCHANGE ACT OF 1934 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______________ to ______ Commission file number _______ PACIFICAMERICA MONEY CENTER, INC. (Exact name of Registrant as specified in its charter) Delaware 6162 95-3302338 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
21031 Ventura Boulevard Woodland Hills, California 91364 (818) 992-8999 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES X NO . --- --- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO . --- --- The number of shares of common stock of the Registrant outstanding as of March 25, 1997: 1,887,855 shares. The aggregate market value of the outstanding common stock of the Registrant held by non-affiliates of the Registrant, based on the market price at March 25, 1997 was approximately $49,551,120. Documents Incorporated by Reference Certain portions of the following documents are incorporated by reference into Part III of this Form 10-K: The Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held July 10, 1997. 2 PACIFICAMERICA MONEY CENTER, INC. PART I ITEM 1. BUSINESS BACKGROUND PacificAmerica Money Center, Inc. (the "Company") is a Delaware corporation formed in 1994 for the purpose of completing a restructuring of Presidential Mortgage Company, a California limited partnership (the "Partnership"). On June 27, 1996, the Company and the Partnership completed the restructuring (the "Restructuring"), as a result of which all of the assets and liabilities of the Partnership were transferred to the Company in exchange for common stock of the Company (the "Common Stock"). Pursuant to the Restructuring, 603,234 shares of Common Stock were issued to partners of the Partnership (other than partners accepting the "Cash Out Option") for their interests in the Partnership , and $2,855,600.00 was paid by the Company to partners electing a "Cash Out Option." As a part of the Restructuring, the Company also sold to the general partner of the Partnership (the "General Partner") 563,333 warrants (the "General Partner Warrants"), each exercisable until December 27, 1997 for one share of Common Stock, at an exercise price of $15.00 per share. Concurrently with the solicitation of consent of the partners of the Partnership for the Restructuring pursuant to the Proxy Statement/Prospectus dated May 16, 1996, the Company made a rights offering to the partners of the Partnership and certain other related persons of the Partnership (the "Rights Offering"), pursuant to which a total of 324,628 shares were subscribed for and issued at $10 per share and 64,893 warrants ("Subscriber Warrants") were also issued to such subscribers, each exercisable until June 27, 1998 for one share of Common Stock at an exercise price of $12.50 per share. Pursuant to a Prospectus dated June 24, 1996, the Company also conducted a public offering of additional shares of Common Stock at $10 per share (the "Public Offering"). A total of 878,210 shares were issued in the Public Offering, including 114,549 shares in connection with the exercise of an over-allotment option by the underwriter of the Public Offering. The Company issued a total of 1,806,072 shares of Common Stock in connection with the Restructuring, the Rights Offering and the Public Offering. As of March 15, 1997, due to issuance of 53,120 shares of Common Stock under the Company's Stock Purchase Plan, the issuance of 11,560 shares of Common Stock upon exercise of incentive stock options, the exercise of 1,583 Subscriber Warrants and the exercise of 14,270 General Partner Warrants, a total of 1,886,605 shares of Common Stock, 63,310 Subscriber Warrants and 549,063 General Partner Warrants were outstanding. The shares of Common Stock are listed for trading on the Nasdaq National Market under the symbol "PAMM." From the date of its formation in 1981 until 1988, the Partnership's sole business was the direct origination and servicing of real estate secured loans under California consumer and commercial finance lender licenses. In 1988, the Partnership formed Pacific Thrift and Loan Company, a California corporation ("Pacific Thrift"), as a wholly owned subsidiary, to engage 2 3 in the business of origination, purchase and sale of real estate secured loans under a California Thrift and Loan License. Pacific Thrift also accepts deposits insured by the Federal Deposit Insurance Corporation ("FDIC"), and is therefore subject to regulation by both the FDIC and the California Department of Corporations ("DOC"). Since 1990, substantially all new lending activity has been conducted by Pacific Thrift. The Company also owns another subsidiary, PacificAmerica Money Centers, Inc., doing business in California as PacificAmerica Money Center of California ("PacificAmerica Centers"), (formerly known as PacificAmerica Lending, Inc.), formed for the purpose of engaging in the lending business under a California finance lender's license and other state licenses where management deems it appropriate. As of the date hereof, PacificAmerica Centers has not engaged in significant loan production, but it may become more active in the future, depending upon business requirements. Pursuant to the Restructuring, the Company also acquired substantially all of the Partnership's interests in three subsidiaries engaged in the trust deed foreclosure services and posting and publishing businesses, Consolidated Reconveyance Company ("CRC"), a California limited partnership, Lenders Posting and Publishing Company ("LPPC"), a California limited partnership, and Consolidated Reconveyance Corporation ("CRCWA"), a Washington corporation. Effective December 31, 1996, substantially all of the assets of CRC and LPPC and all of the stock of CRCWA were sold as part of the Company's strategy to concentrate all of its financial and human resources on its primary business of residential lending for securitization. The Company's main offices are located at 21031 Ventura Boulevard, Suite 102, Woodland Hills, California 91364. Its telephone number is (818) 992-8999. ORGANIZATIONAL STRUCTURE THE COMPANY. The Company now acts as a holding company for Pacific Thrift and PacificAmerica Centers. All of the Company's business operations and substantially all of its assets are held through these subsidiaries. PACIFIC THRIFT. Pacific Thrift is a California licensed Thrift and Loan Company that commenced business in 1988 and is supervised and regulated by the DOC and the FDIC. The deposits of Pacific Thrift are insured by the FDIC up to applicable limits. Pacific Thrift conducts its operations at its main office in Woodland Hills and produces loans through five loan production offices in California located in Irvine, San Diego, San Jose, Walnut Creek and West Covina, as well as six loan production offices located in other states, including Phoenix, Arizona, Golden, Colorado, Las Vegas, Nevada, Portland, Oregon, Salt Lake City, Utah, and Bellevue, Washington. In addition, Pacific Thrift originates loans through 117 commission-based loan representatives (as of December 31, 1996) who currently operate in 32 states throughout the United States. Pacific Thrift focuses on the origination of "sub-prime" residential loans to borrowers whose credit histories limit their ability to qualify for lower rate financing at more credit sensitive financial institutions. Until mid-1996, Pacific Thrift also originated loans for its own loan portfolio, including loans secured by residential, multi-family and commercial property. During 3 4 1996, Management determined to discontinue originating portfolio loans as part of its strategy to concentrate all of its financial and human resources on the origination of loans for sale and securitization. The production of loans for securitization has continued to increase over the past three years as Pacific Thrift has steadily expanded its geographic lending areas. As of March 15, 1997, Pacific Thrift, was authorized to originate loans in 47 states and the District of Columbia. Pacific Thrift does not offer lease financing or credit lines. Pacific Thrift offers passbook accounts, term certificates and money market certificates. Pacific Thrift does not offer other traditional banking services, such as checking accounts, travelers' checks or safe deposit boxes. During 1996, Pacific Thrift completed the sale of approximately $26.2 million of portfolio loans and loan participations to two third-party purchasers as part of its strategy to concentrate its resources on loan origination for sale and securitization. The largest sale occurred in the fourth quarter of 1996, when the Company completed the sale of approximately $18 million in commercial loans. The Company reported a net gain (including release of reserve for loan losses) of approximately $1.0 million in connection with the sale. As a result of loan sales and the discontinuation of portfolio loan origination programs, Pacific Thrift's loan portfolio had been reduced to an aggregate principal balance of $31.8 million at December 31, 1996, from $40.6 million at December 31, 1995. An additional $10.5 of portfolio loans were reclassified as loans held for sale at December 31, 1996 and sold in the first two months of 1997. CRC, CRCWA AND LPPC Until the sale of substantially all its assets by the Company as of December 31, 1996, CRC provided foreclosure related services on real estate trust deeds, including foreclosure sales and trust deed reconveyances. Until the sale of substantially all its assets by the Company as of December 31, 1996, LPPC provided posting and publishing of notices of default and notices of sale for CRC and other trust deed foreclosure companies. CRC provided services on trust deeds to over 300 banks, thrifts, mortgage banks, life insurance companies and federal regulatory agencies located across the country. Approximately one-third of CRC's revenues were derived from lenders located outside of California. All of the stock of CRCWA was also sold by the Company as of December 31, 1996. CRCWA provided foreclosure related services on real estate trust deeds secured by property located in the State of Washington. Less than 5% of the revenues of CRC, CRCWA or LPPC were derived from services provided to the Company and Pacific Thrift. Total combined net income of CRC, CRCWA and LPPC was approximately $.4 million, $.9 million and $.9 million for each of the years ended December 31, 1996, 1995 and 1994, respectively. The total purchase price for the assets and stock and goodwill of CRC, LPPC and CRCWA was $1.8 million, subject to increase or decrease in an amount equal to the increase or decrease in the total combined partners' and shareholders' equity of CRC, LPPC and CRCWA, as shown on the audited consolidating balance sheets of the Company at December 31, 1996, from November 30, 1996. The purchase price was reduced by $74,000 pursuant to the foregoing adjustment provision. As a result of the transaction, the Company wrote off approximately $.9 4 5 million of goodwill, and recognized an additional loss of $.1 million on operations for November and December of 1996. PACIFICAMERICA CENTERS PacificAmerica Centers was formed by the Partnership in 1994 for the purposes of acquiring the Partnership's directly held loan portfolio and acting as a licensed lender in California and various other states as management deemed appropriate. Following the Restructuring in 1996, PacificAmerica Centers became a licensed California Finance Lender, California Real Estate Broker, licensed Vermont Lender and licensed New Jersey Mortgage Broker and Secondary Mortgage Loan Lender. PacificAmerica Centers has also applied or intends to apply for lending licenses in all of the 47 states in which it is not currently licensed and the District of Columbia during 1997. PacificAmerica Centers does not currently have its own staff or separate offices. The loan portfolio acquired by PacificAmerica Centers from the Partnership in the Restructuring consisted primarily of loans originated prior to 1994 which were not suitable for securitization, and which had an aggregate principal balance of approximately $7.0 million as of June 30, 1996. In January 1997, the Company sold, with recourse, approximately $2.3 million of this loan portfolio, at a discount of approximately $44,000 from the net book value of the loans, less reserves and participations previously sold to the purchaser. The Company used a portion of the proceeds of this sale to make the final $745,000 payment on the Company's bank loan, and the balance of the proceeds to provide additional funds for its residential mortgage lending and securitization business. Pacific Thrift will continue to service the loans for the purchaser, and the Company has guaranteed the purchaser of the loans against any loss due to a deficiency in the value of the secured property acquired in foreclosure, a loss caused by a senior lien holder taking title to the secured property or a loss after the purchaser determines that legal title to the secured property cannot be acquired, as well as for losses due to environmental claims, litigation claims or a default by the Company with respect to certain other customary representations and warranties. As of February 28, 1997, the remaining loan portfolio acquired by PacificAmerica Centers from the Partnership had an aggregate principal balance of approximately $2.4 million (net of specific reserves of $.5 million). The loan portfolio is serviced by Pacific Thrift for a servicing fee of 1.5% per year of the principal balance of each loan serviced. LENDING ACTIVITIES GENERAL The Company has, for the past three years, originated both portfolio loans and loans for sale and securitization. In 1996, Management determined to discontinue the origination of portfolio loans and concentrate all of its resources on increasing the volume of loans originated for sale and securitization. The following table sets forth the combined loan originations by category and purchases, sales and repayments for 1996: 5 6
AT OR FOR THE YEAR AT OR FOR THE YEAR ENDED DECEMBER 31, ENDED DECEMBER 31, 1996 1995 (Dollars in Thousands) Beginning Balance(1) 56,485 $ 65,056 Loans Originated for Sale................. 335,471 151,538 Portfolio Loans originated: One- to four-family.............. 14,280 3,067 Multi-family..................... 8,578 4,521 Commercial....................... 13,619 11,585 Construction and land............ 1,510 150 Home improvement................. -0- -0- ------- ------- Total loans originated........... 37,987 19,323 Loans purchased.................................... -0- -0- ------- ------- Total..................................... 429,943 235,917 Less: Principal repayments............................. (12,388) (12,905) Sales of loans originated for sale............... (337,563) (145,832) Sales of portfolio loans......................... (26,176) (13,371) Transfers of OREO net of reserves................ (3,945) (7,944) Other net changes(2)............................. 1,791 620 ------- ------- Total loans(1)............................ $51,662 $56,485 ======= =======
(1) Includes loans held for sale. (2) Other net changes includes changes in allowance for loan losses, deferred loan fees, loans in process and unamortized premiums and discounts. MORTGAGE BANKING The Company is primarily engaged in the business of originating and selling high-yielding, non-conforming mortgage loans secured by first or second mortgages on owner-occupied (and, to a lesser extent, non-owner-occupied) one-to-four family residences. The Company specializes in subprime residential loans, which consist of A, B, C and D credit quality subprime loans made to borrowers whose credit histories and/or other factors limit their ability to qualify for lower financing. At December 31, 1996, loan-to-value ratios on loans originated for sale range from 36% to 85%, depending upon the programs jointly established by the Company and purchasers of the Company's loans. Borrowers typically use loan proceeds to consolidate or refinance existing indebtedness and other personal uses. The Company, through Pacific Thrift and PacificAmerica Centers, originates the majority of its loans through its Wholesale Division, which employed 83 loan representatives as of February 28, 1997 throughout the United States, primarily on a commission basis. The Company's Wholesale Division operates primarily without offices in 32 states as of February 28, 1997, using experienced personnel as regional managers to supervise up to 15 loan representatives in each 6 7 region. The Company seeks to expand its Wholesale Division to 120 loan representatives during 1997, although there can be no assurance that it will be successful in reaching this goal. The Company and its loan representatives have developed relationships with over 3,000 independent mortgage brokers throughout the country, who currently provide a majority of the Company's loan volume. Mortgage loan brokers act as intermediaries between property owners and the Company in arranging mortgage loans, and provide a cost effective means of originating loans over a large geographic area. Management has developed policies and procedures to service these brokers which emphasize timely decision making and funding and a competitive fee structure, which encourage brokers to continue bringing new loans to the Company. The Company also intends to expand its loan origination volume through its Retail Division, which currently employs approximately 52 commission-based loan representatives and operates 12 loan production offices as of February 28, 1997. The Retail Division seeks to originate loans directly with borrowers through contacts developed from purchased mailing lists, using telemarketing and direct mail. The Company seeks to expand its Retail Division to approximately 150 loan representatives during 1997, although there can be no assurance that this goal will be achieved. The following table sets forth selected information relating to loan originations for sale and securitization (which does not include portfolio loans or "piggyback loans," which are not originated for sale) during the three years ended December 31, 1996:
Years Ended December 31, ---------------------------------- 1996 1995 ---- ---- Principal balance of loans $335,471,000 $151,538,000 Average principal balance per loan $91,993 $102,681 Percent of first mortgage loans (based on 95.1% 91.5% principal dollar amount of all loans originated) Weighted average interest rate 11.57% 11.02% Weighted average initial loan-to value ratio 66.92% 64.23%
The Company follows the underwriting guidelines provided by the entities which purchase loans for securitization in determining whether to accept or reject each loan application. The purchaser's underwriting guidelines typically specify the credit quality, loan-to-value, and other requirements of the purchaser. To assess the credit quality of each loan, the purchasers require that various factors be considered, including the appraised value of the collateral property, the applicant's payment history, credit profile, employment status and the debt-to-income ratio. The Company's appraisal 7 8 review staff reviews the value of the underlying collateral based on a full appraisal completed by a licensed independent appraiser. Verification of personal financial information and credit history may also be required by the loan purchaser prior to closing the loan. Each purchaser has established its own credit grading system based on certain borrower characteristics. Each loan applicant is placed into one of four letter ratings ("A" through "D," with subratings within some of these categories), depending upon a number of factors including the applicant's credit history and employment. Interest rates, as well as the maximum loan-to-value ratios, vary depending upon the classification of the borrowers. LOAN SALES AND SECURITIZATIONS The Company sells substantially all of its loan origination volume through negotiated agreements with larger mortgage lenders. A substantial majority of the Company's loans originated for sale for the past three years have been sold to Aames Capital Corporation ("Aames") under agreements providing for the Company to receive premium payments in cash upon sale, with no continuing interest in the loans after sale. In the fourth quarter of 1996, the Company entered new agreements with Aames and with Advanta Mortgage Corporation and Advanta Mortgage Conduit, Inc. ("Advanta"), pursuant to which the Company retains the right to receive the excess interest payments ("excess spread") on its loans above the specified rates paid to holders of certificates in each securitization pool in which the Company's loans are included, less securitization and credit enhancement fees expenses, and sponsor and servicing fees, which excess spread is partially paid as an advance upon the closing of each securitization and partially paid over the life of the loans. To the extent that a loss is realized on loans sold by the Company in each pool, losses will be paid first out of excess spread that would otherwise be paid to the Company from its interest in the payments. Loans sold by the Company for securitization are pooled by the purchaser with loans originated by other lenders into REMIC trusts in which various classes of pass-through interests are sold. Each pool is credit enhanced either through an insurance policy issued by a monoline insurer or through over collateralization. As a result, the senior interests in each REMIC trust receive a rating of "AAA" from Standard & Poor's Ratings Group and "Aaa" from Moody's Investor Service, Inc. Pacific Thrift began selling residential loans for securitization to Aames in 1993. For the years ended December 31, 1995 and 1996, the Company and Pacific Thrift sold $132.5 million and $276.7 million, respectively, of loans to Aames. Loans sold to Aames from December 1993 through September 1996 were primarily sold for a cash premium received by Pacific Thrift on the date of sale and securitization. For loans sold from September 1994 through December 1995, a small servicing released fee payable over the life of the loans was also retained by Pacific Thrift. Pacific Thrift had no other continuing interest in payments made on the loans after the date of sale. In October 1996, the Company entered a new agreement with Aames, under which it agreed to deliver a minimum of $300 million of loans for purchase and securitization by Aames. Under the 1996 agreement, the Company is entitled to receive the following payments: (i) principal plus accrued interest for the loans sold on the date of sale, (ii) interest payments actually 8 9 received pending each quarterly securitization date, less a servicing fee and warehousing fee; (iii) an amount equal to the discounted present value of any interest-only strip sold by Aames representing the premium value of loans sold by the Company, or its equivalent value as determined by the investment banks managing the securitization if an interest-only strip is not sold; (iv) an advance equal to 35% of the present value of the excess spread payments anticipated to be received by the Company over the life of the loans in each securitization; and (v) excess spread payments, representing that portion of the payments received by Aames over the life of each securitization pool for its residual interest in each securitization that are attributable to loans sold by the Company, less monthly sponsor and servicing fees and the excess spread advance plus interest thereon until the advance is repaid to Aames. Payment obligations of Aames are secured by a guaranty of its parent, Aames Financial Corporation. In lieu of an interest-only strip sale for the first sales of loans made under the 1996 agreement with Aames in December 1996, Aames provided a higher advance payment to the Company representing the present value of the excess spread payments. In March 1997, the loan sale agreement with Aames was amended to provide that the Company would have no further obligation to deliver minimum quantities of loans for purchase by Aames. At such time as Aames developed a home equity line of credit program with slightly higher loan-to-value ratios than the loan programs currently offered by Aames, the Company has agreed to sell any loans originated by it under that program to Aames, and the Company may also sell other loans to Aames in its discretion. In connection with this amendment, the parties agreed that the purchase price for approximately $15 million of loans previously sold by the Company to Aames but not included in its December quarter securitization would be adjusted to a cash premium paid in full as of the date of the amendment in lieu of any rights to "excess spread" on such loans. The amendment further provides that an additional premium payment for this $15 million of loans will be paid at such time as the Company has delivered at least $250 million of loans for purchase by Aames under the 1996 Agreement. In 1995, Pacific Thrift began selling loans to Advanta. For the year ended December 31, 1996, the Company sold $60.9 million of loans to Advanta. As of December 16, 1996, the Company entered a new loan sale agreement with Advanta pursuant to which the Company has committed to sell a minimum of $200 million of residential loans to Advanta by December 31, 1999. The agreement provides for the Company to receive the following payments: (i) principal plus accrued interest for the loans sold on the date of sale, (ii) an initial premium payment equal to a percentage of the principal balance of all loans sold, which is treated as an advance against future excess spread payments and (iii) additional payments over the life of the loans sold equal to the excess spread payments made on such loans above the rates paid to investors in the securitization pools in which the loans are placed, less the initial premium payment and certain sponsor and servicer fees. Sales under the new agreement with Advanta are made as often as twice each week, and the Company has sold $84.1 million of loans to Advanta under the new agreement between January 1, 1997 and February 28, 1997. All loans sold to Aames and Advanta by Pacific Thrift and the Company for the past three years have been included in securitization pools formed and serviced by Aames and Advanta, respectively. All loans have been sold on a nonrecourse basis, except for the obligation to 9 10 repurchase any loan which does not meet certain customary representations and warranties, and the obligation to repurchase loans adversely affected by any breach of general representations and warranties. Management of the Company may enter into additional agreements with other purchasers in the future to sell loans for securitization. In addition, management may determine to begin sponsoring its own securitization program after its loan pools have a developed a history of performance which can be used for rating and credit enhancement purposes. To the extent that the Company or one of its subsidiaries originates loans for sale, it bears an interest rate risk between the loan approval date and the date that each loan is securitized. However, loans are generally securitized on a quarterly basis, which reduces the risk of interest rate fluctuations. In addition, because subprime residential loans have a higher interest rate spread than prime residential loans, fluctuations in rates which may occur during the period prior to securitization could reduce the excess spread anticipated to be retained by the Company upon securitization, but would not generally be sufficiently large to eliminate the excess spread entirely. Loans which are held for sale during the period prior to sale are accounted for at the lower of cost or market value of such loans. PORTFOLIO LENDING. Until Pacific Thrift began originating loans for securitization in 1994, both the Partnership and Pacific Thrift originated loans for their own loan portfolios, and generally held and serviced those loans until payoff or refinancing. All portfolio loans were secured primarily by one-to-four family residential, multi-family residential, commercial and, to a very minor extent, undeveloped, real property. In 1996, as volume levels of loans originated for sale and securitization increased, management determined to terminate portfolio lending in order to concentrate its resources on loans originated for sale and securitization. The Company also determined to sell portions of its loan portfolio to provide additional resources for use in its mortgage banking business, and completed sales of an aggregate of approximately $26.2 million of portfolio loans in 1996. The characteristics of the Company's remaining loan portfolio at December 31, 1996, are described below. GEOGRAPHIC CONCENTRATION. At December 31, 1996, the Company's loan portfolio included loans geographically distributed, based on principal loan balances, approximately 65% in Southern California (south of San Luis Obispo) and 21% in Northern California, The remaining 14% of all loans were secured by real property located in other states, primarily New York, Washington, Oregon and Florida. The Company's portfolio loan policy limits the total dollar amount of loans and total number of loans made in each zip code area to no more than 5% of its total outstanding loans. COLLATERAL. At each of the dates set forth below the gross loan portfolio of the Company (net of reserves for loan losses) was collateralized by the following types of real property: 10 11
DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994 DEC. 31 1996 PERCENTAGE OF TOTAL DEC. 31, 1995 PERCENTAGE OF DEC. 31, 1994 PERCENTAGE OF LOAN BALANCES PORTFOLIO LOAN BALANCES TOTAL PORTFOLIO LOAN BALANCES TOTAL PORTFOLIO One-to-four family residential property 1st TDs $ 2,629,371 7.19% $ 5,553,762 11.33% $ 6,271,007 10.66% 2nd TDs 11,148,015 30.48 8,149,818 16.62 11,983,931 20.39 3rd TDs 700,997 1.92 968,926 1.98 1,833,001 3.12 Home Imp. Loans 1,321,983 3.61 1,742,976 3.55 2,298,050 3.91 --------- ----- ----------- ---- ---------- ----- TOTAL 15,800,366 43,20 16,415,482 33.48 22,385,989 38.08 ========== ===== =========== ===== ========== ===== Five and Over Multi-Family residential property 1st TDs 8,467,515 23.15 8,534,795 17.41 13,531,290 23.02 2nd TDs 840,081 2.30 1,811,741 3.70 3,154,197 5.37 3rd TDs -0- -0- -0- -0- 34,993 .06 --------- ----- ----------- ----- ---------- ----- TOTAL 9,307,596 25.45 10,346,536 21.11 16,720,480 28.45 ========= ===== =========== ===== ========== ===== Commercial Property 1st TDs 9,761,472 26.69 18,145,302 37.02 14,184,456 24.13 2nd TDs 869,128 2.38 2,172,655 4.43 3,579,936 6.09 3rd TDs 101,757 .28 68,766 .14 104,212 .18 ---------- ----- ----------- ----- ---------- ----- TOTAL 10,732,357 29.35 20,386,723 41.59 17,868,604 30.40 ========== ===== =========== ===== ========== ===== Undeveloped Property 1st TDs 732,424 2.00 1,873,953 3.82 1,805,151 3.07 2nd TDs -0- -0- -0- -0- -0- -0- 3rd TDs -0- -0- -0- -0- -0- -0- ------- ---- ----------- ----- --------- ----- TOTAL 732,424 2.00 1,873,953 3.82 1,805,151 3.07 ======= ==== =========== ===== ========= ===== TOTAL PORTFOLIO 1st TDs 21,590,782 59.04 34,107,812 69.58 35,791,904 60.88 2nd TDs 12,857,224 35.16 12,134,214 24.75 18,718,064 31.85 3rd TDs 802,754 2.19 1,037,692 2.12 1,972,206 3.36 Home Imp. Loans 1,321,983 3.61 1,742,976 3.55 2,298,050 3.91 ---------- ------ ----------- ----- ----------- ------ TOTAL $36,572,743 100.00% $49,022,694 100.00% $58,780,224 100.00% =========== ======= =========== ======= =========== ======
LOAN ORIGINATION AND UNDERWRITING. Each portfolio loan made by the Company (other than "piggyback" loans as described below), was analyzed at origination based on the loan applicant's credit history and repayment ability. Portfolio loans generally required credit histories from independent credit reporting companies and proof of income. 11 12 Since 1995, Pacific Thrift has also made"piggyback loans," which are residential loans made in tandem with loans originated for sale. Management uses piggyback loans to enhance the loan products available from some of its loan purchasers, and thereby increase production of loans originated for sale. Piggyback loans meet the same credit and documentation requirements as the companion senior loans originated for sale, except that loan-to-value ratios are usually 5% higher than the loan-to-value ratios allowed by the purchaser of the senior loans. To compensate for the higher loan-to-value ratios, Pacific Thrift provides higher general reserves for piggyback loans. From time to time, Pacific Thrift sells piggyback loans to third party purchasers. During 1996, Pacific Thrift sold $5.5 million in piggyback loans, of which $3.8 million were sold for a discount of approximately 1% of par value and the remaining $1.7 million were sold at par value. As of December 31, 1996, Pacific Thrift held 1,229 piggyback loans, with aggregate principal balances of $9,067,000. MATURITIES AND RATE SENSITIVITIES OF LOAN PORTFOLIO. The following table sets forth the contractual maturities of the loan portfolio at December 31, 1996.
AT DECEMBER 31, 1996 -------------------------------------------------------------------------------- MORE MORE MORE THAN MORE THAN THAN 5 THAN 10 MORE ONE YEAR 1 YEAR TO 3 YEARS YEARS TO YEARS TO THAN 20 TOTAL OR LESS 3 YEARS TO 5 YEARS 10 YEARS 20 YEARS YEARS LOANS -------- --------- ---------- -------- -------- ------- ----- (IN THOUSANDS) One- to four-family........... 1,106 1,040 925 59 9,648 1,700 14,478 Multi-family.................. 444 353 421 4,446 278 3,366 9,308 Commercial.................... 1,435 877 1,121 5,227 1,327 745 10,732 Construction and land......... 336 0 149 0 0 248 733 Home improvement.............. 0 0 0 1,322 0 0 1,322 Total amount due.............. 3,321 2,270 2,616 11,054 11,253 6,059 36,573
The following table sets forth, as of December 31, 1996, the dollar amounts of loans receivable (not including loans held for sale) that are contractually due after December 31, 1997 and whether such loans have fixed or adjustable interest rates:
DUE AFTER DECEMBER 31, 1997 ------------------------------------------- FIXED ADJUSTABLE(1) TOTAL ----- ------------- ----- (IN THOUSANDS) One- to four-family............. 10,054 3,318 13,372 Multi-family.................... 657 8,207 8,864 Commercial...................... 1,248 8,049 9,297 Construction and land........... 0 397 397 Home improvement................ 1,322 -0- 1,322 ------- ------- ------ Total loans receivable........ $13,281 $19,971 33,252 ======= ======= ======
(1) Includes approximately $2.3 million in loans to facilitate the sale of real estate held in foreclosure. 12 13 Pacific Thrift and PacificAmerica Centers generally rewrite a portfolio loan at maturity if the borrower makes a new loan application. In cases where the loan-to-value ratio has declined on an existing loan and no longer meets the applicable loan-to-value guidelines, the policy is to make an exception and rewrite the loan. A substantial portion of the Company's loan portfolio is repriced, pays off or matures approximately every year. Of the 41% of all loans bearing fixed rates at December 31, 1996, 5% were due in one year or less. Based upon these facts, over 63% of the loan portfolio at December 31, 1996, consisted of either variable rate loans or fixed rate loans which mature within one year. Management therefore expects that within one year, approximately 63% of the loan portfolio will be paid off or reprice at the rate in effect on the existing loan at the time the loan is repriced or the then applicable rate for new or refinanced loans. The initial interest rate on variable rate loans is set as of the date of origination of each loan based upon the then prevailing reference rate established by Bank of America. The rate may increase by not less than .125% in any three-month period, but may not increase by more than five (10 in some cases) percentage points in the aggregate. Such increases (or decreases, as the case may be) occur at three-month intervals as the result of changes in the Bank of America reference rate. Although the interest rate may decrease, it cannot decrease below the original interest rate set for each loan. CLASSIFIED ASSETS AND LOAN LOSSES. The general policy of Pacific Thrift and PacificAmerica Centers is to discontinue accrual of interest and make a provision for anticipated loss on a loan when: (i) it is more than two payments contractually past due and the current estimated loan-to-value ratio is 90% or more; or (ii) the loan exhibits the characteristics of an in-substance foreclosure, generally including any loan as to which the borrower does not have the ability, willingness or motivation to repay the loan. The current estimated loan-to-value ratios of substantially all delinquent loans are determined by new independent appraisal or broker price opinions, unless an independent appraisal was obtained no more than twelve months prior to the monthly review of each delinquent loan. When a loan is reclassified from accrual to nonaccrual status, all previously accrued interest is reversed. Interest income on nonaccrual loans is subsequently recognized when the loan resumes payment or becomes contractually current as appropriate. Loans which are deemed fully or partially uncollectible by management are generally fully reserved or charged off for the amount that exceeds the estimated net realizable value (net of selling costs) of the underlying real estate collateral. Gains on the sale of real estate acquired in settlement of loans ("OREO") are not recognized until the close of escrow. Unless an extension, modification or rewritten loan is obtained, or a bankruptcy is filed, the policy of Pacific Thrift and PacificAmerica Centers is to commence procedures for a non-judicial trustee's sale within 30 to 60 days of a payment delinquency on a loan under the power of sale provisions of the trust deed securing such loan, as regulated by applicable law. A delinquent loan will only be rewritten or extended if it can be determined that the borrower has the ability to repay the loan on the modified terms. The initiation of foreclosure proceedings against a borrower does not suggest that the recovery of the loan is dependent solely on the underlying collateral. In fact, many borrowers bring payments current or undertake other remedies so that a foreclosure sale is not required. 13 14 The determination of the adequacy of the allowance for loan losses is based on a variety of factors, including loan classifications and underlying loan collateral values, and the level of nonaccrual loans. Therefore, changes in the amount of nonaccrual loans will not necessarily result in increases in the allowance for loan losses. The ratio of nonaccrual loans past due 90 days or more to total loans was 3.81% at December 31, 1996, 1.62% at December 31, 1995 and 5.35% at December 31, 1994. The ratio of the allowance for loan losses to nonaccrual loans past due 90 days or more was 176.76% at December 31, 1996, 533.29% at December 31, 1995 and 136.94% at December 31, 1994. The following table sets forth the number and remaining balances of all loans in the Company's loan portfolio (net of specific reserves for loan losses) that were more than 30 days delinquent at December 31, 1996 and 1995.
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995 -------------------- ----------------------------- Loan Loans Percent of Loans Percent of Delinquencies Delinquent Total Loans Delinquent Total Loans ------------- ---------- ----------- ---------- ----------- 30 to 59 days $1,428,487 3.91% $ 209,979 .43% 60 to 89 days 1,431,115 3.91% 527,260 1.08% 90 days or more 3,019,161 8.25% 2,110,500 4.30% ---------- ------ ---------- ----- TOTAL $5,878,763 16.07% $2,847,739 5.81% ========== ====== ========== =====
NONACCRUAL AND RESTRUCTURED LOANS. The following table sets forth the aggregate amount of loans at December 31, 1996, 1995 and 1994 which were (i) accounted for on a nonaccrual basis; (ii) accruing loans which are contractually past due 90 days or more as to principal and interest payments; and (iii) troubled debt restructurings. Pacific Thrift and PacificAmerica Centers follow a practice of extending or modifying loans in certain circumstances. Loans modified to reduce interest rates below market rates, to reduce amounts due at maturity to reduce accrued interest or to loan additional funds are considered "troubled debt restructurings" as defined in SFAS 15.
Accruing Loans Nonaccruing Loans Past Due Past Due 90 Days Troubled Debt 90 Days or More or More Restructurings Total --------------- ---------------- -------------- ----- (Dollars in Thousands) At December 31, 1996 $1,625 $1,394 $357 $3,376 At December 31, 1995 $1,317 $ 793 $948 $3,058 At December 31, 1994 $2,603 $3,146 $ 0 $5,749
The following table sets forth information concerning interest accruals and interest on nonaccrual loans past due 90 days as of December 31, 1996, 1995 and 1994. 14 15
Interest Interest Not Contractually Recognized on Due on Loans Interest Accrued Nonaccrual Past Due on Loans Past Due Loans Past Due 90 Days or More 90 Days or More 90 Days or More --------------- ----------------- --------------- (Dollars in Thousands) At December 31, 1996 $ 886 $133 $ 753 At December 31, 1995 $ 673 $125 $ 548 At December 31, 1994 $1,524 $262 $1,262
Upon request of a borrower, Pacific Thrift and PacificAmerica Centers have generally granted one to two month extensions of payments during the term of a loan. In 1996, 10 loans with an aggregate principal balance of $1.15 million were extended. No loan was extended for a term of more than six months. In 1996, 11 loans with an aggregate principal balance of $1.23 million were modified and five delinquent loans with an aggregate principal balance of $.5 million were rewritten. Pacific Thrift and PacificAmerica Centers apply the same documentation standards on a rewritten loan as on an original loan. Pacific Thrift and PacificAmerica Centers make these accommodations only if it can be determined that the borrower has the ability to repay the loan on the modified terms. In general, this determination is made based upon a review of the borrower's current income, current debt to income ratio, or anticipated sale of the collateral. At December 31, 1996, Pacific Thrift and PacificAmerica Centers held OREO (net of specific reserves) of $4.3 million (inclusive of senior liens of $1.6 million). In accordance with the policy for recognizing losses upon acquisition of OREO, Pacific Thrift and PacificAmerica Centers charge off or post specific reserves for those portions of the loans with respect to which OREO has been acquired to the extent of the difference between the loan amount and the estimated fair value of the OREO. Included in OREO at December 31, 1996 were 13 single-family residences with an aggregate net book value of $1.2 million (inclusive of $.7 million senior liens); five multi-family units with an aggregate net book value of $1.1 million (inclusive of .6 million senior liens); 10 commercial properties with an aggregate net book value of $1.8 million (inclusive of .3 million senior liens); and two undeveloped properties with an aggregate net book value of $.2 million (with no senior liens). For the year ended December 31, 1996, total expenses on operation, including valuation allowances, and losses on sale of OREO were $1.0 million and gains on sale of OREO and OREO income were $.3 million, for a total expense of $.7 million. There can be no assurance that net losses on the sale of OREO will not be experienced in the future. ALLOWANCE FOR LOAN LOSSES. The following is a summary of the changes in the consolidated allowance for loan losses of Pacific Thrift and PacificAmerica Centers for each of the years ended December 31, 1996, 1995 and 1994: 15 16
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 (IN THOUSANDS) ---------------------------------------- Balance at beginning of period..................... $ 4,229 $ 4,307 $ 3,123 Provision for loan losses.......................... 1,151 3,289 6,096 Chargeoffs: (3,187) (3,369) (4,912) Recoveries......................................... 271 2 -- ------- -------- ------- Balance at end of period........................... $ 2,464 $ 4,229 $ 4,307 ======= ======== =======
Pacific Thrift uses an asset classification system pursuant to which every delinquent loan and every performing loan which exhibits certain risk characteristics is graded monthly, and a general reserve percentage is assigned to each classification level. Management of Pacific Thrift and PacificAmerica Centers also reviews every delinquent loan on a monthly basis and reviews the current estimated fair market value of the property securing that loan. To the extent that the amount of the delinquent loan exceeds the estimated fair market value of the property, an additional reserve provision is made for that loan. Pacific Thrift's current policy is to maintain an allowance for loan losses equal to the amount determined necessary based upon Pacific Thrift's asset classification policy, which is written to conform with generally accepted accounting principles and FDIC requirements. PacificAmerica Center's current policy is to maintain an allowance for loan losses determined in accordance with generally accepted accounting principles. Management utilizes its best judgment in providing for possible loan losses and establishing the allowance for loan losses. However, the allowance is an estimate which is inherently uncertain and depends on the outcome of future events. In addition, regulatory agencies, as an integral part of their examination process, periodically review Pacific Thrift's allowance for loan losses. Such agencies could require Pacific Thrift, just as any other FDIC-insured institution, to post additions to the allowance based upon their judgment of the information available to them at the time of their examination. Implicit in lending activities is the fact that losses will be experienced and that the amount of such losses will vary from time to time, depending upon the risk characteristics of the portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense. The conclusion that a loan may become uncollectible, in whole or in part, is a matter of judgment. INVESTMENT ACTIVITIES Although the Company does not maintain a directly held investment portfolio, Pacific Thrift does maintain an investment portfolio, which is used primarily for liquidity purposes and secondarily for investment income. Pacific Thrift's policy is to invest cash in short-term U.S. government securities or federal funds sold due in less than 30 days. 16 17 Overnight federal funds sold are limited to no more than 100% of total capital at any single financial institution that is either adequately or well capitalized. If the financial institution is neither adequately nor well capitalized, the limit is $100,000. As of December 31, 1996 and 1995, Pacific Thrift held investments in federal funds totaling $5.3 million and $7.7 million, respectively. SOURCES OF FUNDS DEPOSITS. Pacific Thrift's major source of funds is FDIC-insured deposits, including passbook savings accounts, money market accounts and investment certificates (similar to certificates of deposit). Pacific Thrift attracts customers for its deposits by offering rates that are slightly higher than rates offered by large commercial banks and savings and loans. Pacific Thrift has no brokered deposits as of the date hereof. Management believes its deposits are a stable and reliable funding source. At December 31, 1996, Pacific Thrift had outstanding 2,094 deposit accounts of approximately $81.0 million. The following table sets forth the average balances and average rates paid on each category of Pacific Thrift's deposits for the three years ended December 31, 1996. DEPOSIT ANALYSIS
Averages for 1996 Averages for 1995 Averages for 1994 ----------------- ----------------- ----------------- (Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands) Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate Passbook/Money Market $31,300 5.20% $13,322 5.39% $23,868 3.79% Investment Certificates $47,582 5.86% $49,931 6.20% $43,828 4.59% under $100,000 Investment Certificates over $100,000 -0- -0- 100 7.02% $ 415 6.68% ------- ---- ------- ---- ------- ---- Total 78,882 5.60% $63,353 6.03% $68,111 4.32% ======= ===== ======= ==== ======= ====
The following schedule sets forth the time remaining until maturity for all certificates at December 31, 1996, 1995 and 1994. 17 18 DEPOSIT MATURITIES
At At At December 31, December 31, December 31, 1996 1995 1994 (Dollars in (Dollars in (Dollars in Thousands) Thousands) Thousands) Passbook/Money Market $24,659 $24,275 $11,443 ------- ------- ------- Accounts under $100,000 3 months or less 14,451 $12,723 $25,522 Over 3 months through 6 months 19,745 13,439 17,201 Over 6 months through 12 months 22,147 9,084 10,654 Over 12 months -0- 635 4,579 -------- -------- ------- Total $56,343 $35,881 $57,956 ------- ------- ------- Accounts over $100,000 3 months or less -0- -0- $102 Over 3 months through 6 months -0- -0- -0- Over 6 months through 12 months -0- -0- -0- Over 12 months -0- -0- -0- ------- ------- ------- Total -0- -0- $102 ------- ------- ------- TOTAL DEPOSITS $81,002 $60,156 $69,501 ======= ======= =======
OTHER BORROWINGS. The Partnership made use of substantial lines of credit from major banks to fund its loan portfolio growth from 1984 through 1989. The original bank loan provided in 1990 was a revolving credit line of $105 million, under which the Partnership borrowed a maximum of $82 million during 1990. The credit line was reduced by mutual agreement in 1991 to $48 million with an $18 million interim loan. In March 1992, the Partnership was informed that the lender had determined to reduce its exposure to California real estate secured lending due to the general decline in California real estate values and increasing delinquency rates. From 1992 through December 1996, the loan agreement was amended annually to provide for a steady pay down of the remaining loan balance. The Partnership and the Company continued making regular paydowns of the balance owed until the Company made the last payment in January 1997. COMPETITION Pacific Thrift and PacificAmerica Centers have significant competition for the origination of subprime mortgage loans from other mortgage companies and other financial institutions. Some of the these companies are substantially larger than the Company and have extensive branch systems and advertising programs which the Company does not have. For the past two years, competition in the subprime lending market has increased 18 19 as larger, more traditional mortgage lenders have sought to expand their markets to include B, C and D loans. Management believes that the over 20 years of experience of each its senior executive officers in the sub-prime lending market provide the Company with competitive advantages over new entrants to this lending market, and that this experience has enabled the Company to substantially increase new loan originations notwithstanding the increase in competition. Pacific Thrift faces competition for depositors' funds from other thrift and loans, banks, savings and loans, credit unions, mutual funds and life insurance annuity products. Pacific Thrift does not offer checking accounts, travelers' checks or safe deposit boxes and thus has a competitive disadvantage to commercial banks and savings associations in attracting depositors. Pacific Thrift compensates for the lack of a full array of services by offering slightly higher interest rates for deposits than most large banks and savings and loans, while remaining interest rate competitive with smaller banks, savings and loan associations and thrift and loans. EMPLOYEES As of December 31, 1996, the Company and its subsidiaries had 351 full-time employees, including 117 commission-based loan representatives. SUPERVISION AND REGULATION Financial and lending institutions are extensively regulated under both federal and state law. Set forth below is a summary description of the principal laws which relate to the regulation of Pacific Thrift and PacificAmerica Centers. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. CONSUMER PROTECTION LAWS Pacific Thrift and PacificAmerica Centers are subject to numerous federal and state consumer protection laws, including the Federal Truth-In-Lending Act, the Federal Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Federal Fair Debt Collection Practices Act and the Federal Reserve Board's Regulations B and Z. These laws and regulations, among other things, limit certain finance charges, fees and other charges on loans, require certain disclosures be made to borrowers and loan applicants, regulate the credit application and evaluation process and regulate certain servicing and collection practices. These laws and regulations impose specific liability upon lenders who fail to comply with their provisions, and may give rise to defense to payment of a borrower's obligation in the event of a failure to comply with certain applicable laws. Pacific Thrift and PacificAmerica Centers believe they are currently in compliance in all material respects with all applicable laws, but there can be no assurance that they will be able to maintain such compliance. The failure to comply with such laws, or a determination by a court that 19 20 their interpretation of law was erroneous, could have a material adverse effect on Pacific Thrift or PacificAmerica Centers. STATE LAW PACIFICAMERICA CENTERS PacificAmerica Centers is subject to regulation, supervision and examination by the DOC under its California Finance Lender Licenses. The California Finance Lender Law and regulations of the DOC promulgated thereunder provide maximum charges and fees (although most limitations apply only to loans under $5,000 or $10,000), provide certain maximum repayment terms for loans under $5,000, provide certain required disclosure documents to borrowers, limit sales of loans to certain purchasers, and provide certain penalties for violations of applicable laws and regulations. PACIFIC THRIFT Pacific Thrift is subject to regulation, supervision and examination by the DOC under its California Thrift and Loan License. On July 1, 1997, state regulatory jurisdiction of Pacific Thrift will be transferred to a new Department of Financial Institutions ("DFI"), which will regulate all banks, savings and loans, thrift and loans, and credit unions chartered by the State of California. The thrift and loan business conducted by Pacific Thrift is governed by the California Industrial Loan Law and the rules and regulations of the DOC (DFI as of July 1, 1997) which, among other things, regulate collateral requirements and maximum maturities of the various types of loans that are permitted to be made by California-licensed thrift and loan companies. Subject to restrictions imposed by applicable California law, Pacific Thrift is permitted to make secured and unsecured consumer and non-consumer loans. The maximum term of repayment of loans made by thrift and loan companies ranges up to 40 years and 30 days depending upon collateral and priority of the secured position, except that loans with repayment terms in excess of 30 years and 30 days may not in the aggregate exceed 5% of the total outstanding loans and obligations of the company. Although secured loans may generally be repayable in unequal periodic payments during their respective terms, consumer loans secured by real property with terms in excess of three years must be repayable in substantially equal periodic payments unless such loans are covered under the Garn-St. Germain Depository Institutions Act of 1982 (primarily one-to-four family residential mortgage loans). California law limits loans by thrift and loan companies to persons who do not reside in California to no more than 20% of total assets, or up to 40% of total assets with approval of the DOC. California law contains extensive requirements for the diversification of the loan portfolio of thrift and loan companies. A thrift and loan with outstanding investment certificates may not, among other things, have more than 25% of its loans or other obligations in loans or obligations which are secured only partially, but 20 21 not primarily, by real property; may not make any one loan secured primarily by improved property which exceeds 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; may not lend an amount in excess of 5% of its paid-up and unimpaired capital stock and surplus not available for dividends upon the security of the stock of any one corporation; may not make loans to, or hold the obligations of, any one person or control group as primary obligor in an aggregate principal amount exceeding 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; and may have no more than 70% of its total assets in loans which have remaining terms to maturity in excess of seven years and are secured solely or primarily by real property. A thrift and loan generally may not make any loan to, or hold an obligation of, any of its directors, officers or any shareholder holding 10% or more of its shares, or any director or officer or any shareholder holding 10% or more of the shares of its holding company or affiliates, except in specified cases and subject to regulation by the DOC. A thrift and loan may not make any loan to, or hold an obligation of, any of its shareholders or any shareholder or its holding company or affiliates. There are currently no outstanding loans made by Pacific Thrift to any officers or directors of the Company or any of its affiliates. Any person who wishes to acquire 10% or more of the capital stock of a California thrift and loan company or 10% or more of the voting capital stock or other securities giving control over management of its parent company must obtain the prior written approval of the DOC. A thrift and loan is subject to certain leverage limitations which are not generally applicable to commercial banks or savings and loan associations. In particular, thrift and loans may not have outstanding at any time investment certificates that exceed 20 times paid-up and unimpaired capital and surplus. Under California law, thrift and loans that desire to increase their leverage must meet specified minimum standards for liquidity reserves in cash, loan loss reserves, minimum capital stock levels and minimum unimpaired paid-in surplus levels. As approved by the DOC, Pacific Thrift can currently operate with a ratio of deposits to unimpaired capital and unimpaired surplus of up to 15:1. At December 31, 1996, Pacific Thrift's deposit ratio was 9.1:1. Thrift and loan companies are not permitted to borrow, except by the sale of investment or thrift certificates, in an amount exceeding 300% of tangible net worth, surplus and undivided profits, without the DOC's prior consent. All sums borrowed in excess of 150% of tangible net worth, surplus and undivided profits must be unsecured borrowings or, if secured, approved in advance by the DOC, and be included as investment or thrift certificates for purposes of computing the maximum amount of certificates a thrift and loan may issue. However, collateralized Federal Home Loan Bank advances are excluded for this test of secured borrowings and are not specifically limited by California law. Pacific Thrift had no borrowed funds (other than deposits) at December 31, 1996. Under California law, thrift and loan companies are generally limited to investments, other than loans, that are legal investments for commercial banks. A thrift and loan company may acquire real property only in satisfaction of debts previously 21 22 contracted, pursuant to certain foreclosure transactions or as may be necessary for the transaction of its business, in which case such investment, combined with all investments in personal property, is limited to one-third of a thrift and loan's paid-in capital stock and surplus not available for dividends. Management believes Pacific Thrift was in compliance with these provisions throughout 1996 and at December 31, 1996. Although investment authority and other activities that may be engaged in by Pacific Thrift generally are prescribed under the California Industrial Loan Law, certain provisions of FDIC Improvement Act may limit Pacific Thrift's ability to engage in certain activities that otherwise are authorized under the California Industrial Loan Law. FEDERAL LAW Pacific Thrift's deposits are insured by the FDIC to the full extent permissible by law. As an insurer of deposits, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally supervises the operations of institutions for which it provides deposit insurance. Among the numerous applicable regulations are those issued under the Community Reinvestment Act of 1977 ("CRA") to encourage insured state nonmember banks, such as Pacific Thrift, to meet the credit needs of local communities, including low and moderate income neighborhoods, consistent with safety and soundness, and a rating system to measure performance. Inadequacies of performance may result in regulatory action by the FDIC. Pacific Thrift received a satisfactory rating with respect to its CRA compliance in its most recent FDIC compliance examination completed in November 1995. Pacific Thrift is subject to the rules and regulations of the FDIC to the same extent as all other state banks that are not members of the Federal Reserve System. The approval of the FDIC is required prior to any merger, consolidation or change in control, or the establishment or relocation of any branch office of Pacific Thrift. This supervision and regulation is intended primarily for the protection of the deposit insurance funds. Under provisions of the FDIC Improvement Act and regulations issued by the FDIC, additional limitations have been imposed with respect to depository institutions' authority to accept, renew or rollover brokered deposits. Pacific Thrift does not have any brokered deposits as of the date hereof. Pacific Thrift is subject to certain capital adequacy guidelines issued by the FDIC. See "Federal Law -- Capital Adequacy Guidelines" under this heading. REGULATORY ACTIONS In December 1994, the FDIC notified Pacific Thrift that it was classified as "critically undercapitalized" as of October 31, 1994. Pacific Thrift had sufficiently restored its regulatory capital ratios from net operating profits and capital contributions as 22 23 of April 30, 1995 to be classified as "adequately capitalized" under FDIC regulations. The FDIC confirmed Pacific Thrift's adequate capitalization by letter dated May 8, 1995. On May 18, 1995, Pacific Thrift entered a stipulated cease and desist order with the FDIC and the DOC (the "1995 Order") replacing a 1993 Cease and Desist Order. The terms of the 1995 Order require Pacific Thrift to: have and retain qualified management; by December 31, 1995, increase and maintain Tier 1 capital (consisting of shareholders' equity) at 8% of its total assets; eliminate assets classified "loss" as of September 26, 1994; reduce the level of adversely classified assets; in certain instances, refrain from extending additional credit to borrowers whose prior credits have been adversely classified; maintain a fully funded allowance for loan losses; implement Pacific Thrift's capital restoration and business/profitability plans; correct a past violation of the thrift ratio requirement and comply with all applicable laws and regulations; file reports of condition and income which accurately reflect its financial condition; obtain FDIC approval prior to payment of any cash dividends; continue to comply with its Policy for Transactions and Relationships Between Affiliates; obtain FDIC approval before opening additional offices; and furnish written quarterly progress reports to the FDIC detailing actions taken to comply with the 1995 Order. On April 1, 1996, as a result of its improved capital ratios and operations, the 1995 Order was terminated and replaced with a Memorandum of Understanding ("MOU") between Pacific Thrift, the FDIC and the DOC. This informal agreement provides that Pacific Thrift shall: (i) maintain Tier I capital of 8% or more of its total assets; (ii) maintain an adequate reserve for loan losses, which shall be reviewed quarterly by its board of directors; (iii) eliminate assets classified "loss" as of September 30, 1995, reduce assets classified "substandard" as of September 30, 1995 to not more than $4,000,000 within 180 days, and reduce all assets classified substandard, doubtful and loss to no more than 50% of capital and reserves by September 30, 1996; (iv) obtain FDIC approval before opening additional offices; (v) develop strategies to stabilize its net interest margin on portfolio loans and develop procedures to implement these strategies; and (vi) furnish written quarterly progress reports to the FDIC detailing actions taken to comply with the MOU. Management of Pacific Thrift believes that it is in full compliance with the terms of the 1996 MOU. As of December 31, 1996, Pacific Thrift has increased its capital ratios to the levels which meet the regulatory definition of "well capitalized," the highest regulatory capital level. However, since the 1996 MOU contains a provision requiring the maintenance of a certain capital level (which it currently meets), Pacific Thrift is currently classified as "adequately capitalized" under the regulations. RESTRICTIONS ON TRANSFERS OF FUNDS TO AFFILIATES BY PACIFIC THRIFT There are statutory and regulatory limitations on the amount of dividends which may be paid to the Company by Pacific Thrift. Under California law, a thrift and loan is not permitted to declare dividends on its capital stock unless it has at least $750,000 of unimpaired capital plus additional capital of $50,000 for each branch office maintained. 23 24 In addition, no distribution of dividends is permitted unless: (i) such distribution would not exceed a thrift's retained earnings; or, (ii) in the alternative, after giving effect to the distribution, (a) the sum of a thrift's assets (net of goodwill, capitalized research and development expenses and deferred charges) would be not less than 125% of its liabilities (net of deferred taxes, income and other credits), or (b) current assets would be not less than current liabilities (except that if a thrift's average earnings before taxes for the last two years had been less than average interest expenses, current assets must not be less than 125% of current liabilities). In addition, a thrift and loan is prohibited from paying dividends from that portion of capital which its board of directors has declared restricted for dividend payment purposes. The amount of restricted capital maintained by a thrift and loan provides the basis of establishing the maximum amount that a thrift may lend to a single borrower and determines the amount of capital that may be counted by the thrift for purposes of calculating the thrift to capital ratio. Pacific Thrift has, in the past, restricted as much capital as necessary to support its level of assets. The board of directors of Pacific Thrift may unrestrict all or any portion of its equity in the future for dividends to the Company, provided that Pacific Thrift remains adequately capitalized. The FDIC also has authority to prohibit Pacific Thrift, just as any other FDIC- insured institution, from engaging in what, in the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the FDIC has established guidelines with respect to the maintenance of appropriate levels of capital by banks under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of the FDIC Improvement Act could limit the amount of dividends which Pacific Thrift may pay to the Company. See "Capital Standards" under this heading for a discussion of these additional restrictions on capital distributions. Pacific Thrift, just as any other FDIC-insured institution, is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and other affiliates from borrowing from Pacific Thrift unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by Pacific Thrift to or in the Company or to or in any other affiliate is limited to 10% of Pacific Thrift's capital and surplus (as defined by federal regulations) and such secured loans and investments are limited, in the aggregate, to 20% of Pacific Thrift's capital and surplus (as defined by federal regulations). In addition, any transaction with an affiliate of Pacific Thrift must be on terms and under circumstances that are substantially the same as a comparable transaction with a non-affiliate. Additional 24 25 restrictions on transactions with affiliates may be imposed on Pacific Thrift, just as any other FDIC-insured institution, under the prompt corrective action provisions of the FDIC Improvement Act. Management believes that Pacific Thrift is in compliance with all provisions regarding transactions with affiliates. CAPITAL STANDARDS The Federal Reserve Board and the FDIC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a depository institution's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans. A depository institution's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which includes off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, noncumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, cumulative preferred stock, long term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk- adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. At December 31, 1996, Pacific Thrift's total risk-based capital ratio was 11.87% In addition to the risk-based guidelines, federal banking regulators require depository institutions to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a depository institution rated in the highest of the five categories used by regulators to rate depository institutions, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all depository institutions not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. At December 31, 1996, Pacific Thrift's leverage ratio was 8.67%. 25 26 In January 1995, the federal banking agencies issued a final rule relating to capital standards and the risks arising from the concentration of credit and nontraditional activities. Institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities and who fail to adequately manage these risks, will be required to set aside capital in excess of the regulatory minimums. The federal banking agencies have not imposed any quantitative assessment for determining when these risks are significant, but have identified these issues as important factors they will review in assessing an individual bank's capital adequacy. In December 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss reserves to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets classified substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. Management believes that Pacific Thrift is in compliance with these requirements. Federally supervised banks and savings associations are currently required to report deferred tax assets in accordance with SFAS No. 109. The federal banking agencies issued final rules, effective April 1, 1995, which limit the amount of deferred tax assets that are allowable in computing an institution's regulatory capital. The standard has been in effect on an interim basis since March 1993. Deferred tax assets that can be realized for taxes paid in prior carryback years and from future reversals of existing taxable temporary differences are generally not limited. Deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital purposes to the lesser of (i) the amount that can be realized within one year of the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any deferred tax in excess of this limit would be excluded from Tier 1 Capital and total assets and regulatory capital calculations. Management believes that Pacific Thrift is in compliance with these requirements. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of Pacific Thrift, just as any other FDIC-insured institution, to grow and could restrict the amount of profits, if any, available for the payment of dividends. The following table presents the capital ratios for Pacific Thrift, as of December 31, 1996, compared to the regulatory capital requirements for well capitalized institutions.
December 31, 1996 ----------------- Actual Well ------ Capitalized Ratio Requirement ----- ----------- Leverage ratio............................ 8.67% 5.0%(1) Tier 1 risk-based ratio................... 10.62% 6.0% Total risk-based ratio.................... 11.87% 10.0%
26 27 (1) Pursuant to the 1996 MOU, Pacific Thrift is required to maintain a minimum 8.0% leverage ratio. PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. In September 1992, the federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of federal law. An insured depository institution generally will be classified in the following categories based on capital measures indicated below: "Well capitalized" "Adequately capitalized" ------------------ ------------------------ Total risk-based capital of 10%; Total risk-based capital of 8%; Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and Leverage ratio of 5%. Leverage ratio of 4% (3% if the institution receives the highest rating from its primary regulator) "Undercapitalized" "Significantly undercapitalized" ------------------ -------------------------------- Total risk-based capital less than 8%; Total risk-based capital less than 6%; Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or Leverage ratio less than 4% (3% if the Leverage ratio less than 3%. institution receives the highest rating from its primary regulator) "Critically undercapitalized" ----------------------------- Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions and required to obtain prior regulatory 27 28 approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency 45 days after becoming undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan (i) specifies the steps the institution will take to become adequately capitalized, (ii) is based on realistic assumptions and (iii) is likely to succeed in restoring the depository institution's capital. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt correction action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors and/or senior executive officers; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions as determined by the appropriate federal banking agency. Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, 28 29 with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. In addition to measures taken under the prompt corrective action provisions, commercial depository institutions may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease and desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. SAFETY AND SOUNDNESS STANDARDS In July 1995, the federal banking agencies adopted final guidelines establishing standards for safety and soundness, as required by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Guidelines for asset quality and earnings standards will be adopted in the future. The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. In December 1992, the federal banking agencies issued final regulations prescribing uniform guidelines for real estate lending. The regulations, which became effective on March 19, 1993, require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations. 29 30 Appraisals for "real estate related financial transactions" must be conducted by either state certified or state licensed appraisers for transactions in excess of certain amounts. State certified appraisers are required for all transactions with a transaction value of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or more; and for "complex" 1-4 family residential properties of $250,000 or more. A state licensed appraiser is required for all other appraisals. However, appraisals performed in connection with "federally related transactions" must now comply with the agencies' appraisal standards. Federally related transactions include the sale, lease, purchase, investment in, or exchange of, real property or interests in real property, the financing or refinancing of real property, and the use of real property or interests in real property as security for a loan or investment, including mortgage-backed securities. PREMIUMS FOR DEPOSIT INSURANCE Pacific Thrift's deposit accounts are insured by the FDIC generally up to a maximum of $100,000 per separately insured depositor, and Pacific Thrift, like all FDIC- insured institutions, is subject to FDIC deposit insurance assessments. Pursuant to FDICIA, the FDIC adopted a risk-based system for determining deposit insurance assessments under which all insured institutions were placed into one of nine categories and assessed annual insurance premiums, ranging from $2,000 to 0.27% of insured deposits, based upon their level of capital and supervisory evaluation. Because the FDIC sets the assessment rates based upon the level of assets in the insurance fund, premium rates rise and fall as the number and size of bank failures increases and decreases, respectively. Under the system, institutions are assigned to one of three capital groups which is based solely on the level of an institution's capital - "well capitalized," "adequately capitalized" and "undercapitalized" - which are defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of FDIA, as discussed in "-- Capital Standards." These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be of minimal supervisory concern to those which are considered to be of substantial supervisory concern. INTERSTATE BANKING AND BRANCHING In September 1994, the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate Act, beginning one year after the date of enactment, a bank holding company that is adequately capitalized and managed may obtain approval under the BHCA to acquire an existing bank located in another state without regard to state law. A bank holding company would not be permitted to make such an acquisition if, upon consummation, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks. An out-of-state bank holding company may not acquire a state bank in existence 30 31 for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five year existence requirement. The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may permit such combinations earlier than June 1, 1997, and may adopt legislation to prohibit interstate mergers after that date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirements and conditions as for a merger transaction. In October 1995, California adopted "opt in" legislation under the Interstate Act that permits out-of-state banks to acquire California banks that satisfy a five-year minimum age requirement (subject to exceptions for supervisory transactions) by means of merger or purchases of assets, although entry through acquisition of individual branches of California institutions and de novo branching into California are not permitted. The Interstate Act and the California branching statute will likely increase competition from out-of-state banks in the markets in which Pacific Thrift operates, although it is difficult to assess the impact that such increased competition may have on Pacific Thrift's operations. COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS Pacific Thrift, just as all other mortgage lenders, is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. The FDIC has rated Pacific Thrift "satisfactory" in complying with its CRA obligations. In May 1995, the federal banking agencies issued final regulations which change the manner in which they measure a depository institution's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. In March 1994, the Federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: (i) overt evidence of discrimination; (ii) evidence of disparate treatment and (iii) evidence of disparate impact. 31 32 POTENTIAL ENFORCEMENT ACTIONS. Insured depository institutions, such as Pacific Thrift, and their institution-affiliated parties, which include the Company, may be subject to potential enforcement actions by the FDIC and the DOC for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits and with respect to Pacific Thrift and the Company, could also include the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the imposition of restrictions and sanctions under the PCA provisions of the FDIC Improvement Act. Management knows of no pending or threatened enforcement actions against Pacific Thrift. ITEM 2. PROPERTIES The Company, Pacific Thrift and PacificAmerica Centers do business at their main offices in Woodland Hills, California. Pacific Thrift also does business at five loan production offices in California located in Irvine, San Diego, San Jose, Walnut Creek and West Covina, as well as six loan production offices located in other states, including Phoenix, Arizona, Golden, Colorado, Las Vegas, Nevada, Portland, Oregon, Salt Lake City, Utah and Bellevue, Washington. All of the offices at which the Company and its subsidiaries conduct business are leased. With the exception of the Woodland Hills, Walnut Creek and Irvine offices, all of the offices are on short-term leases of 18 months or less. Information with respect to the Woodland Hills, Walnut Creek and Irvine offices as of December 31, 1996 is as follows:
Floor Space Annual Expiration Location in Square Ft. Rental(1) Date - -------- ------------- ------ ---------- Woodland Hills, CA(2) 19,600 $539,178 07/31/03 Walnut Creek, CA(3) 14,414 336,346 11/14/00 Irvine, CA(4) 11,108 173,280 12/31/01
(1) Subject to annual adjustment in accordance with customary escalation clauses, except as provided in footnote 2 below with respect to the Woodland Hills lease, which only provides for escalation of expense sharing obligations. (2) Pursuant to a lease entered January 11, 1993, annual rental increases by $11,760 from August 1, 1998 through January 31, 2001, and by another $11,760 from February 1, 2001 through July 31, 2003. The lease is accounted for on the straight 32 33 line average method of accounting, in accordance with generally accepted accounting principles. (3) Pursuant to a lease agreement entered October 31, 1990 and last amended May 8, 1996, annual rent increases by $2,809 from September 15, 1997 through November 14, 2000. This does not include two separate month to month leases in the same building at an annualized rental rate of $50,580. (4) The annual rent increases by $10,668 from July 1, 1999 through December 31, 2001. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to certain legal proceedings incidental to its lending business and to its trust deed foreclosure service businesses which were sold as of December 31, 1996. Some of these actions seek unspecified damages or substantial monetary damages in the form of punitive damages. The ultimate outcome of such litigation cannot presently be determined. Management, after review and consultation with counsel, and based upon historical experience with prior actions, has determined that the outcome of such proceedings would not have a material adverse impact on the Company's business, financial condition or results of operations. In addition to actions incidental to its business, the Company and/or its subsidiaries are parties to the following actions. 33 34 Foreclosure Services Actions. On June 6, 1995, CRC and LPPC were served with a complaint by Consumer Action and two consumers suing both individually and on behalf of the general public in an unfair business practices action filed in the Superior Court of Contra Costa County, California. The complaint named CRC and LPPC, along with thirteen other foreclosure service and foreclosure publishing companies, and alleges that all named defendants charge fees in excess of the statutorily permitted amount for publication of notices of trustee sales. The complaint seeks restitution of all excess charges, an injunction against the charging of excessive fees in the future and attorneys fees. In January 1996, LPPC and two other posting and publishing companies were dismissed from the action without prejudice. As of March 20, 1996, a tentative global settlement of the action had been reached, pursuant to which CRC would pay damages in an amount immaterial to the Company as a whole. There can be no assurance that the settlement will be concluded, or that damages in any litigation that might ensue would not be material to the Company. In 1996, CRC was served with a complaint by seven individuals suing both individually and on behalf of the general public in a purported class action filed in the Superior Court of Los Angeles County, California. The complaint names over 50 defendants, including numerous title insurance companies and trust deed services companies, generally alleging that the title insurance companies did not make certain refunds of certain trustee sale guarantee fees ("TSGs") which they were required to make under the terms of a settlement of a previous case (in which CRC was not named), and that the trust deed services companies failed to purchase less costly alternative products, to request and remit refunds in the cost of TSGs or to advise the members of the class of their right to a refund from the title insurance companies. As of March 20, 1996, the court had sustained CRC's demurrer to the complaint, as well as other trustees' demurrers and motions for judgment on the pleadings, and the plaintiffs had been given 20 days to file an amended complaint. At this time, there is no way to determine the exact nature and extent of damages, which will not be able to be specified until the amended complaint has been filed. Management believes, however, based upon consultation with its counsel in this action, that any liability that may incurred by CRC in this action would be immaterial to the Company as a whole. As part of the agreement to sell the assets of CRC and LPPC, the Company has retained substantially all of any liability that may result from these two actions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of stockholders during the fourth quarter of 1996. EXECUTIVE OFFICERS The following table sets forth certain information concerning the Company's executive officers. 34 35 PRINCIPAL OCCUPATION OR EMPLOYMENT AND NAME AGE OCCUPATION FOR THE PAST FIVE YEARS ---- --- --------------------------------------- Joel R. Schultz 60 Chairman of the Board, President, Chief Executive Officer and Chief Operating Officer of the Company; Chief Managing Officer of the Partnership from 1981 to June 1996; Chairman of the Board and Chief Executive Officer of Pacific Thrift since 1988; President of Pacific Thrift from 1988 to December 1993; Chairman of the Board, President and Chief Executive Officer of PacificAmerica Centers; California licensed attorney-at-law; Certified Public Accountant; California licensed real estate broker. Richard D. Young 57 Director and Senior Executive Vice President of the Company; Senior Executive Vice President and Chief Operating Officer and a director of PacificAmerica Centers; President and Chief Operating Officer of Pacific Thrift from November 1993 to present; director of Pacific Thrift from November 1993 to present; Chief Operating Officer of the Partnership from May 1994 until June 1996; President and Chief Executive Officer of Topa Thrift and Loan from 1983 to 1993; President of Thrift Guaranty Corporation from 1984 to 1988; director of Thrift Guaranty Corporation from 1983 to 1988 and from 1989 to 1995, when the Thrift Guaranty Corporation was liquidated; member, Mortgage Bankers Association Secondary and Capital Markets Committee; member, California Association of Thrift and Loan Companies ("CATL") Regulatory Committee; member and former chairman, CATL Executive Committee; former chairman, CATL Legislative Committee; Vice President of CATL (1995-present). Charles J. Siegel 47 Chief Financial Officer and Assistant Secretary of the Company; Chief Financial Officer of Pacific Thrift from December 1993 to present; Chief Financial Officer of PacificAmerica Centers from June 1996 to present; Chief Financial Officer of the Partnership from May 1994 to June 1996; Chief Financial Officer of Topa Thrift and Loan from 1983 to 1993; Certified Public Accountant. Frank Landini 45 Executive Vice President in charge of the Wholesale Division of Pacific Thrift since December 1994; Senior Vice President of Pacific Thrift from October 1993 to December 1994; Senior Vice President of Topa Thrift and Loan from 1983 to 1993. Norman A. Markiewicz 50 Executive Vice President of the Company; Chief Operating Officer of the Partnership from 1981 to May 1994; Chief Operating Officer of Pacific Thrift from 1988 to September 1993; Executive Vice President of Pacific Thrift from 1993 to present; director of Pacific Thrift from 1988 to present; Executive Vice President of PacificAmerica Centers. Richard B. Fremed 54 Executive Vice President and Secretary of the Company; Chief Financial Officer of the Partnership from 1981 to April 1994; Chief Financial Officer of Pacific Thrift from 1988 to December 1993; Secretary of Pacific Thrift from December 1988 to present; Treasurer of Pacific Thrift from December 1993 to present; director of Pacific Thrift from 1988 to present; Certified Management Accountant and California licensed real estate sales person. 35 36 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since June 25, 1996, the Company's Common Stock has been traded on the Nasdaq National Market. The high and low sales prices for the Common Stock during the third and fourth quarters of 1996, as reported on the Nasdaq National Market, were as follows:
High Low ---- --- Third Quarter $22.25 $13.00 Fourth Quarter $32.00 $21.75
On March 21, 1997, the closing sale price for the Common Stock reported on the Nasdaq National Market was $30.00 per share. As of March 15, 1997, there were approximately 1,500 shareholders of the Common Stock, including the beneficial holders whose shares are held of record by brokerage firms and clearing agencies. DIVIDEND POLICY The Company, which was recently organized, has never paid a cash dividend on its Common Stock. The Company's ability to pay dividends is subject to restrictions set forth in the Delaware General Corporation law. The Delaware Corporation Law provides that a Delaware corporation may pay dividends either (i) out of the corporation's surplus (as defined in Delaware law), or (ii) if there is no surplus, out of the corporation's net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. However, pursuant to Section 2115 of the California General Corporation Law, under certain circumstances, certain provisions of the California General Corporation Law may be applied to foreign corporations qualified to do business in California, which may reduce the amount of dividends payable by the Company. Since the Company derives a substantial amount of its revenues from Pacific Thrift, a California corporation, California law and FDIC regulations with respect to dividends will have a substantial effect on the Company's ability to pay dividends. Under California law, a corporation is prohibited from paying dividends unless (i) the retained earnings of the corporation immediately prior to the distribution exceeds the amount of the distribution; (ii) the assets of the corporation exceed 1-1/4 times its liabilities; or (iii) the current assets of the corporation exceed its current liabilities, but if the average pretax net earnings of the corporation before interest expense for the two years preceding the distribution was less than the average interest expense of the corporation for those years, the current assets of the corporation must exceed 1-1/4 times its current liabilities. 36 37 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following tables present selected consolidated financial and other data of the Company (or the Partnership for periods prior to June 27, 1996) as of and for each of the years in the five years ended December 31, 1996. The information below should be read in conjunction with, and is qualified in its entirety by, the more detailed information included elsewhere in this Report, including the Consolidated Financial Statements of the Company and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 (DOLLARS IN THOUSANDS) ----------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Total interest income $ 11,502 $ 9,577 $ 11,404 $ 14,212 $ 16,827 Total interest expense 4,966 5,199 4,927 5,718 6,725 Net interest income 6,536 4,378 6,477 8,494 10,102 Total noninterest income 29,994 9,440 2,071 998 1,805 Provision for loan losses 1,151 3,289 6,096 4,655 3,888 Other real estate owned expense 681 1,212 732 3,307 1,014 General and administrative expense 28,227 13,099 12,140 8,794 8,292 Provision (benefit) for income taxes 1,658 (1,223) 1 1 1 --------- --------- --------- --------- --------- Net income from continuing operations 4,813 (2,559) (10,421) (7,265) (1,288) Income from discontinued operations 387 861 907 1,396 1,436 Loss on disposal of discontinued operations (1,038) -0- -0- -0- -0- Income (loss) $ 4,162 $ (1,698) $ (9,514) $ (5,869) $ 148 ========= ========= ========= ========= ========= Distributions paid -0- -0- -0- 1,943 4,610 Primary earnings per share Continuing operations $ 2.27 n/a n/a n/a n/a Discontinued operations (0.28) n/a n/a n/a n/a Net income 1.99 n/a n/a n/a n/a Fully diluted earnings per share Continuing operations $ 2.12 n/a n/a n/a n/a Discontinued operations (0.28) n/a n/a n/a n/a Net income 1.84 n/a n/a n/a n/a STATEMENT OF FINANCIAL CONDITION DATA: Total assets $ 114,934 $ 82,994 $ 103,747 $ 114,324 $ 120,216 Net loans(1) 51,662 56,486 65,056 84,755 101,405 Total deposits 81,002 60,156 69,501 62,421 50,561 Equity 21,966 8,727 10,425 19,939 28,830 SELECTED RATIOS (%) Return on average assets 4.21% (1.82)% (8.73)% (5.00)% .11% Return on average equity 27.12% (17.73)% (62.67)% (24.07)% .45% Net interest margin(2) 7.46% 5.79% 6.82% 8.65% 8.71% Noninterest expense to average assets 29.21% 15.33% 11.81% 10.32% 7.20% Efficiency ratio(3) 79.13% 103.57% 150.58% 127.49% 78.16% Efficiency ratio excluding REO expense(3) 77.27% 94.80% 142.02% 92.65% 69.64% General and administrative expense to average assets 28.52% 14.03% 11.13% 7.50% 6.41% Average equity to average assets 15.51% 10.26% 13.92% 20.79% 25.34% Loan originations $ 373,457 $ 170,961 $ 76,838 $ 48,612 $ 53,207 ASSET QUALITY DATA: Nonaccrual loans $ 1,394 $ 793 $ 3,146 $ 5,316 $ 3,253 REO (net of senior liens) 2,728 2,545 5,308 4,225 6,973 Total nonperforming assets 4,122 3,338 8,454 9,541 10,226 Troubled debt restructurings 357 948 -0- -0- -0- Allowance for credit losses 2,464 4,229 4,307 3,122 2,646 Net loan charge offs $ 2,916 3,367 4,912 4,178 3,063 ASSET QUALITY RATIOS:
37 38
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 (DOLLARS IN THOUSANDS) ----------------------------------------------------------------- Nonperforming assets to total assets............... 3.59% 4.02% 8.15% 8.35% 8.51% Allowance for credit losses to net loans........... 4.77% 7.49% 6.62% 3.68% 2.61% Allowance for credit losses to nonaccrual loans.... 176.76% 533.29% 136.94% 58.74% 81.34% Net loan charge offs to average loans.............. 3.58% 5.28% 5.79% 4.12% 2.67%
(1) Net of allowances for loan loss and deferred loan fees and costs, including loans held for sale. (2) Net interest margin represents net interest income divided by total average earning assets. (3) Efficiency ratio represents noninterest expense divided by noninterest income and net interest income. 38 39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the preceding Selected Financial Data and the Company's Financial Statements and the Notes thereto and the other financial data included elsewhere in this Report. The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which always involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below under the heading "Forward Looking Statements." On June 27, 1996, the Company completed the Restructuring with the Partnership, which was accounted for as a change in legal organization but not in the enterprise of the Partnership. Therefore, the financial statements of the Company give effect to the Restructuring as a recapitalization of the Partnership into the Corporation. References to the Company in this Report refer to the financial condition and results of operations of the Partnership on a consolidated basis for all periods prior to June 27, 1996. FINANCIAL CONDITION GENERAL Overview. The Company, through its subsidiaries Pacific Thrift and PacificAmerica Centers, is engaged in the business of originating, purchasing and selling mortgage loans secured primarily by one-to-four family residences. The Company's primary source of revenue is the recognition of gains upon sale of loans. Most loans sold by the Company until the fourth quarter of 1996 were sold for a cash premium received on the date of sale. Beginning in the fourth quarter of 1996, the Company began selling loans under agreements providing that it would retain an interest in the purchasers' residual interest in excess spread in each securitization pool in which the Company's loans were placed. The Company recognizes gain from the sale of these loans as the present value of the interest-only strips, if any and/or excess spread in which it retains interests under its agreements with the purchasers of the loans. Loan Originations. The Company has increased its loan origination volume from $171.0 million during 1994 to $373.5 million during 1996, representing a growth rate of 118.4% over this two year period. This increase in loan origination volume was primarily due to the expansion of the Company's lending operations from one state (California) in 1994 to over 30 states by December 31, 1996. As of February 28, 1997, the Company, through Pacific Thrift and PacificAmerica Centers, was authorized to conduct its lending business in 49 states and the District of Columbia and had lending operations established in 32 states. Until the sale of the assets of CRC and LPPC and the stock of CRCWA as of December 31, 1996, the Company operated two business segments: the subprime residential mortgage lending business and the trust deed foreclosure services business. See Note 18 in the Notes to Consolidated Financial Statements. The Company's primary business has always been subprime residential mortgage lending, and in November 1996, the Company determined to sell CRC, LPPC, and CRCWA in order to devote all of its financial and human resources to its primary lending business. AT DECEMBER 31, 1996 COMPARED WITH DECEMBER 31, 1995. Total consolidated assets of the Company increased $32.0 million (38.6%) to $114.9 million at December 31, 1996 from $82.9 million at December 31, 1995. The increase 39 40 resulted primarily from increases in a receivable for mortgage loan sales, excess yield receivable and deferred income taxes, partially offset by decreases in loans receivable, cash and cash equivalents, and goodwill. A receivable for mortgage loan sales of $24.3 million was held at December 31, 1996 for a pool of loans sold to Advanta, which was paid in January 1997; no similar item was held in 1995. Excess yield receivable increased $9.0 million, to $11.7 million from $2.7 million, due to the Company's retention of an interest in excess spread on loans sold for securitization under agreements with Aames and Advanta. See "Business -- Lending Activities - Loan Sales and Securitizations." The deferred income tax asset increased by $4.3 million to $5.0 million at December 31, 1996, due primarily to an income tax net operating loss carryforward and reversal of a valuation reserve. Loans receivable decreased $10.4 million (23.7%) to $33.5 million from $43.9 million, due to the Company's strategic decision to cease portfolio lending in 1996 and sell portfolio loans to raise additional funds for its mortgage banking business. Cash and cash equivalents decreased by $1.9 million (18.1%) to $8.6 million from $10.5 million, due to timing of payments for loan sales in December. Goodwill decreased $1.8 million (100%) due to the sale of CRC, LPPC and CRCWA. Total liabilities increased $18.8 million (25.3%) to $93.0 million at December 31, 1996 from $74.2 million at December 31, 1995. The increase resulted from an increase in total thrift certificates payable and deferred income tax liability, partially offset by declines in note payable, accounts payable and partnership withdrawals payable. Total thrift certificates payable increased $20.8 million (34.5%), to $81.0 million from 60.2 million, reflecting increased issuance of thrift certificates to fund Pacific Thrift's lending operations. The deferred income tax liability increased by $4.3 million because of temporary differences between when an income tax liability is accrued for financial statement purposes and the date that income taxes are due and payable to the income tax authorities. Note payable decreased $3.5 million (51.5%) to $3.3 million from $6.8 million, due to pay downs of the bank loan in 1996 offset by an advance on excess yield of $2.6 million from Aames, which will be repaid from excess spread payments on loans sold by the Company to Aames for securitization. The remaining balance of $745,000 on the bank loan was completely paid off in January 1997. Accounts payable and accrued expenses decreased $1.8 million (45.0%), to $2.2 million from $4.0 million, due to the sale of CRC. Partnership withdrawals payable of $1.1 million were paid off in 1996 immediately following the Restructuring. Total stockholders' equity increased $13.3 million, due to consolidated net income of $4.2 million in 1996 and the net proceeds of the Company's Rights Offering and Public Offering in 1996. AT DECEMBER 31, 1995 COMPARED WITH DECEMBER 31, 1994. Total consolidated assets of the Partnership decreased $20.8 million (20.1%) to $82.9 million at December 31, 1995 from $103.7 million at December 31, 1994. The decrease resulted primarily from declines in cash and cash equivalents, loans receivable, accounts receivable, OREO and interest receivable, offset by increases in excess yield receivable. Loans receivable decreased by $9.1 million (17.2%), to $43.9 million from $53.0 million, as a result of loan pay offs and loan sales. Cash and cash equivalents decreased by $9.1 million (46.4%), to $10.5 million from $19.6 million. Accounts receivable declined by $1.8 million (35.3%) to $3.3 million at December 31, 1995 from $5.1 million at 40 41 December 31, 1994. Excess yield receivable increased $1.8 million, (200.0%) to $2.7 million from $.9 million due to sales of loans for which Pacific Thrift receives a servicing release fee over the life of the loans sold. See "BUSINESS - -- Lending Activities -- Loans Originated for Sale." OREO declined by $4.5 million (59.2%), to $3.1 million at December 31, 1995 from $7.6 million at December 31, 1994, reflecting sales of OREO. Interest receivable declined by $.2 million (18.2%), to $.9 million from $1.1 million, primarily due to the reduction of the loan portfolio. Total liabilities decreased $19.1 million (20.5%) to $74.2 million at December 31, 1995 from $93.3 million at December 31, 1994. The decrease resulted from declines in notes payable, thrift certificates payable, accounts payable, accrued expenses and interest payable and mortgages payable on OREO. Notes payable decreased by $8 million (54.1%), to $6.8 million from $14.8 million, due to pay down of the Bank Loan. Thrift certificates payable decreased by $9.3 million (13.4%) to $60.2 million from $69.5 million, reflecting the reduction in total assets of Pacific Thrift. Accounts payable, accrued expenses and interest payable decreased by $.4 million (7.1%), to $5.2 million from $5.6 million, primarily due to a $.4 million reduction in accrued expenses for the environmental remediation of OREO acquired by Pacific Thrift after receiving a lower bid for completion of the work. Mortgages payable on OREO decreased by $1.7 million (73.9%), to $.6 million from $2.3 million, due to sale of OREO. Total Partnership capital decreased by $1.7 million (16.3%) to $8.7 million from $10.4 million, due to consolidated net losses of $1.7 million incurred during the year ended December 31, 1995. The consolidated net loss was comprised of a $5.8 million net loss of Presidential, partially offset by a $3.2 million net profit after tax provision of Pacific Thrift, a $.6 million net profit of CRC and a $.3 million net profit of LPPC. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 GENERAL The Company reported net income of $4.2 million for the year ended December 31, 1996, compared with a net loss of $1.7 million for the year ended December 31, 1995. The increase in net income is due primarily to a $20.3 million increase in gain on sale of loans in 1996, which has resulted from steady increases in the Company's loans originations over the past year. Net interest income also increased $2.1 million for the year ended December 31, 1996, primarily due to an increase in total interest income resulting from the Company's retention of interest income on loans originated for sale prior to the date of their securitization. INTEREST INCOME AND EXPENSE Net interest income before provision for loan losses increased $2.1 million (47.7%), to $6.5 million for the year ended December 31, 1996 from $4.4 million for the year ended December 31, 1995. Total interest income increased $1.9 million (19.8%), to 11.5 million for the year ended December 31, 1996 from $9.6 million for the year ended December 31, 1995 as 41 42 a result of interest accrued on loans originated and sold. Interest expense decreased $.2 million (3.8%), to $5.0 million for the year ended December 31, 1996 from $5.2 million for the year ended December 31, 1995, due to declines in interest rates paid on thrift certificates, partially offset by an increase in total outstanding thrift certificates. PROVISION FOR LOAN LOSSES The provision for loan losses decreased $2.1 million (63.6%), to $1.2 million for the year ended December 31, 1996 from $3.3 million for the year ended December 31, 1995, reflecting a $10.4 million decrease in the total amount of portfolio loans held during 1996. The calculation of the adequacy of the allowance for loan losses is based on a variety of factors, including loan classifications and underlying loan collateral values, and is not directly proportional to the level of nonperforming loans. See "BUSINESS -- Classified Assets and Loan Losses." NONINTEREST INCOME AND EXPENSE Total noninterest income (not including income of CRC, LPPC and CRCWA, which are reflected as discontinued operations due to their sale in 1996) increased $20.6 million (219.1%), to $30.0 million for the year ended December 31, 1996 from $9.4 million for the year ended December 31, 1995. Income from discontinued operations was $.4 million in 1996 compared to $.9 million in 1995. In addition, the Company incurred a $1.0 million loss on the sale of CRC, LPPC and CRCWA, primarily from a write-off of related goodwill. The primary source of the increase was the $20.3 million increase in gain on sale of loans, to $29.2 from $8.9 million. Total noninterest expense (not including expenses of CRC, LPPC and CRCWA, which are reflected as discontinued operations due to their sale in 1996) increased $14.6 million (102.1%) to $28.9 million for the year ended December 31, 1996 from $14.3 million for the year ended December 31, 1995, due to expansion of the Company's mortgage banking business which required the addition of more employees and office space. Salary and related benefits increased $8.6 million (143.3%) to $14.6 million from $6.0 million, and general and administrative expenses increased $6.8 million (130.8%), to $12.0 million from $5.2 million, because of expanded mortgage banking activities. Expense on operation of OREO decreased $.5 million (41.7%), to $.7 million from $1.2 million. INCOME TAXES (BENEFIT) Income tax expense from continuing operations was $1.7 million in 1996, compared to an income tax benefit of $1.2 million in 1995. During 1996, the Company reversed valuation allowances for deferred tax assets totaling $1.7 million, based upon events and earnings in 1996 which management believes indicate it is more likely than not that sufficient revenue will be generated in the future to use these deferred tax assets. See Note 8 to the Consolidated Financial Statements for additional information. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 GENERAL The Company incurred a net loss of $1.7 million for the year ended December 31, 1995, compared with a net loss of $9.5 million for the year ended December 31, 1994. For 1995, the loss before income tax benefit and income from discontinued operations was $3.8 million and the net loss was $1.7 million, reflecting a tax benefit of $1.2 million due to Pacific Thrift's use of net operating loss carryforwards. Pacific Thrift had remaining net operating loss carryforwards of approximately $4.0 million at December 31, 1995. There was no income tax benefit from loss carryforwards in 1994. 42 43 NET INTEREST INCOME AND EXPENSE Net interest income before provision for loan losses decreased by $2.1 million (32.3%), to $4.4 million for the year ended December 31, 1995 compared to $6.5 million for the year ended December 31, 1994, as a result of the reduction in total interest income and increase in total interest expense. Total interest income decreased by $1.8 million (15.8%), to $9.6 million for 1995 compared to $11.4 million for 1994, due to reductions in the loan portfolio as assets were reduced to improve capital ratios in Pacific Thrift and pay down the bank loan. Total interest expense increased by $.3 million (6.1%), to $5.2 million for 1995 compared to $4.9 million for 1994, due to higher market interest rates paid on thrift certificates by Pacific Thrift, which offset lower levels of deposits and a reduction in the bank loan. PROVISION FOR LOAN LOSSES The provision for loan losses was $3.3 million for the year ended December 31, 1995, compared to $6.1 million for the year ended December 31, 1994. The total allowance for loan losses was $4.2 million at December 31, 1995, compared with $4.3 million at December 31, 1994, reflecting sales and payoffs of loans on which reserves were previously taken and status improvements in some portfolio loans. The calculation of the adequacy of the allowance for loan losses is based on a variety of factors, including loan classifications and underlying loan collateral values, and is not directly proportional to the level of nonperforming loans. See "BUSINESS -- Classified Assets and Nonperforming Loans - -- Allowance for Loan Losses." The ratio of nonaccrual loans past due 90 days or more to total loans was 1.62% at December 31, 1995, compared to 5.35% at December 31, 1994. The ratio of the allowance for loan losses to nonaccrual loans past due 90 days or more was 533.29% at December 31, 1995, compared to 136.94% at December 31, 1994. NONINTEREST INCOME AND EXPENSE Total noninterest income (not including income of CRC, LPPC and CRCWA, which are reflected as discontinued operations due to their sale in 1996), increased by $7.3 million (347.6%), to $9.4 million for the year ended December 31, 1995 compared to $2.1 million for the year ended December 31, 1994, due to increases in gains on sale of loans by Pacific Thrift. Gains on sale of loans increased by $8.0 million (888.9%), to $8.9 million for 1995 compared to $.9 million for 1994. Pacific Thrift sold a total of $155.4 million of loans during 1995, for a total gain on sale of $8.4 million. These sales included $145 million of securitizable loans, for a gain on sale of $8.6 million, $8.9 million of portfolio loans, for a gain on sale of $.2 million and $2.0 million of home improvement loans, sold at a gain of $.1 million. Other income decreased by $.6 million (54.5%), to $.5 million for 1995 compared to $1.1 million for 1994. 43 44 Noninterest expense (not including expenses of CRC, LPPC and CRCWA, which are reflected as discontinued operations due to their sale in 1996) increased by $1.4 million (10.9%), to $14.3 million for 1995 compared to $12.9 million for 1994. Increases in noninterest expense were primarily due to increases in salaries, employee benefits and personnel services and operations of OREO, partially offset by declines in general and administrative expenses. General and administrative expenses decreased by $.6 million (10.3%) to $5.2 million for 1995 compared to $5.8 million for 1994. Salaries, employee benefits and personnel services increased by $1.2 million (25.0%) to $6.0 million for 1995 compared to $4.8 million for 1994. Expenses on OREO increased by $.5 million (71.4%) to $1.2 million for 1995 compared to $.7 million for 1994. The Company recognized net losses on sales of OREO of $.7 million for 1995 and net gains of $.4 million for 1994. NET INTEREST INCOME ANALYSIS The following table sets forth certain information concerning average interest-earning assets and interest bearing liabilities and the yields and rates thereon. Average balances are calculated on a quarterly basis and nonaccrual loans have been included in interest earning assets for the computations. Fee income on loans included in interest income and in the calculation of average yields was $.3 million, $.7 million and $1.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. 44 45 YIELDS AND RATES ON INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
Year Ended December 31, 1996 ----------------- Average Yield/ Balance Interest Rate ------- -------- ------ (Dollars in Thousands) Assets Interest-earning assets: Loans $ 81,492 $11,174 13.71% Interest-bearing deposits in other financial institutions and securities purchased under agreements to sell 6,155 328 5.33% -------- ------- ----- Total interest-earning assets 87,647 11,502 13.12% ======== ======= ====== Noninterest-earning assets: Cash and due from banks 6,212 Premises & equipment, net 1,875 Real estate acquired in settlement of loans 3,445 Other Assets 6,668 -------- Total noninterest-earning assets 18,200 -------- Less allowance for loan losses 3,712 -------- 102,135 11,502 ======== ======= Liabilities & Stockholders' Equity/Partners' Capital Interest-bearing liabilities: Notes payable 3,831 553 14.43% Savings deposits 31,299 1,627 5.20% Time CDs 47,583 2,787 5.86% -------- ------- ----- Total interest-bearing liabilities 82,713 4,967 6.01% ======== ======= ====== Noninterest-bearing liabilities: Accounts payable & accrued expenses 4,308 -------- Total liabilities 87,021 Stockholders' Equity/Partners' Capital 15,114 -------- ------- $102,135 4,967 ======== ======= Net interest income/spread 6,535 7.12% ======= ====== Net interest margin 7.46% Net Income (loss) 4,162 ======= Average interest earning assets to 1.060% average interest bearing liabilities
Year Ended December 31, 1995 ----------------- Average Yield/ Balance Interest Rate ------- -------- ------ (Dollars in Thousands) Assets Interest-earning assets: Loans $63,711 $8,885 13.95% Interest-bearing deposits in other financial institutions and securities purchased under agreements to sell 11,852 692 5.84% ------ --- ----- Total interest-earning assets 75,563 9,577 12.67% ====== ===== ====== Noninterest-earning assets: Cash and due from banks 5,536 Premises & equipment, net 1,483 Real estate acquired in settlement 5,322 of loans Other Assets 5,290 ------ Total noninterest-earning assets 17,631 ------ Less allowance for loan losses 3,911 ------ 89,283 9,577 ====== ===== Liabilities & Partners' Capital Interest-bearing liabilities: Notes payable 12,601 1,379 10.94% Savings deposits 13,322 718 5.39% Time CDs 50,031 3,102 6.20% ------ ----- ----- Total interest-bearing liabilities 75,954 5,199 6.84% ====== ===== ===== Noninterest-bearing liabilities: Accounts payable & accrued expenses 3,123 ------ Total liabilities 79,077 Partners' Capital 10,206 ------ $89,283 5,199 ====== ===== Net interest income/spread 4,378 5.83% ===== ===== Net interest margin 5.79% Net Income (loss) (1,698) ======= Average interest earning assets to 0.995% average interest bearing liabilities
45 46 Interest income and interest expense can fluctuate widely based on changes in the level of interest rates in the economy. Pacific Thrift attempts to minimize the effect of interest rate fluctuations on net interest margins by matching as nearly as possible interest sensitive assets and interest sensitive liabilities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset/Liability Management." Net interest income can also be affected by a change in the composition of assets and liabilities, such as when higher yielding loans replace lower yielding loans. Net interest income is affected by changes in volume and changes in rates. Volume changes are caused by differences in the level of earning assets and interest-bearing liabilities. Rate changes result from differences in yields earned on assets and rates paid on liabilities. The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities due to changes in volume and interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume; (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume which cannot be segregated, have been allocated proportionately to changes due to volume and changes due to rate.
Rate Volume Analysis -------------------- (Dollars in Thousands) 1996 compared to 1995 Increase (decrease) due to change in ------------------------------------------- Volume Yield/ Net Rate Change Interest-earning assets: Loans 2,439 (150) 2,289 Interest-bearing deposits in other financial institutions and securities purchased under agreements to sell (308) (56) (364) ------ ---- ----- Total interest-earning assets 2,131 (206) 1,925 ====== ==== ===== Interest-bearing liabilities: Notes payable (1,164) 338 (826) Savings deposits 936 (26) 909 Time CDs (148) (168) (315) ------ ---- ----- Total interest-bearing liabilities (376) 144 (232) ====== ==== ===== Change in net interest income 2,507 (350) 2,157 ====== ==== =====
Rate Volume Analysis -------------------- (Dollars in Thousands) 1995 compared to 1994 Increase (decrease) due to change in --------------------------------------- Volume Yield/ Net Rate Change Interest-earning assets: Loans (2,891) 773 (2,118) Interest-bearing deposits in other financial institutions and securities purchased under agreements to sell 76 215 291 ------ ----- ------ Total interest-earning assets (2,815) 988 (1,827) ====== ===== ======= Liabilities & Partners' Capital Interest-bearing liabilities: Notes payable (669) 66 (603) Savings deposits (485) 299 (186) Time CDs 293 768 1,061 ------ ----- ------ Total interest-bearing liabilities (861) 1,133 272 ====== ===== ====== Change in net interest income (1,954) (145) (2,099) ====== ===== ======
46 47 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, cash and cash equivalent assets totaled $8.6 million, compared with $10.5 million at December 31, 1995. The Company's primary operating cash requirements include the funding or payment of: (i) loan originations; (ii) fees and expenses incurred in connection with securitizations; (iii) income taxes; (iv) capital expenditures; and (v) other operating and administrative expenses. The Company generates cash flow from loans sold for securitization, whole loan sales, principal payments and interest income on portfolio loans, and sale of OREO. In addition, on June 27, 1996, the Company completed a Rights Offering and a Public Offering of Common Stock as a part of the Restructuring, which raised net cash proceeds of $11.4 million. The Company expects to continue to depend on advances on its interest in excess spread in securitized loans to fund its cash operating requirements. Several factors affect the Company's ability to complete sales of its loans for securitization, including conditions in the securities markets generally, conditions in the residential sub-prime securitization market specifically, the credit quality of the Company's portfolio of loans and the Company's ability to credit enhance its loans to a level sufficient to obtain investment grade ratings for interests in securitization pools in which its loans are placed. The Company believes that the net proceeds of the Rights Offering and the Public Offering, together with the proceeds of loan sales, net interest income and the issuance of deposits by Pacific Thrift, will be sufficient to fund the Company's liquidity requirements for the foreseeable future. Certificates of deposit which are scheduled to mature in one year or less from December 31, 1996 totaled $56.3 million. Based upon historical experience, management believes that a significant portion of such deposits may be renewed to the extent deemed desirable by management. In general, depositors have historically tended to renew deposits when the rates paid on such deposits remain competitive with rates offered by comparable financial institutions. From time to time during 1994 and 1995, management of Pacific Thrift intentionally took steps to reduce deposit renewals in order to reduce the total amount of deposits. These steps included reducing the interest rates offered on maturing deposits and declining to renew certain large deposits. Pacific Thrift maintains minimum levels of liquid assets as required under the liquidity policy adopted by the board of directors of Pacific Thrift. The relationship between short-term liquid assets and total deposits at December 31, 1996 was 49.0%, which exceeded the 10% minimum established by the Board. At December 31, 1995 and 1994, the liquidity ratio was 31.7% and 26.9%, respectively. Pacific Thrift has a federal funds credit line with Wells Fargo Bank, bearing interest at the federal funds rate as announced from time to time by the Federal Reserve Board, in the amount of $5.0 million. The line is intended to support short term liquidity, and is not expected to be used for more than ten consecutive days or more than 12 times during any 30 47 48 day period. At December 31, 1996, there were no outstanding borrowings under the credit line. Pacific Thrift is subject to certain leverage and risk-based capital adequacy standards applicable to FDIC-insured institutions. At December 31, 1994, Pacific Thrift was classified by the FDIC as "undercapitalized." However, by March 31, 1995, Pacific Thrift was reclassified by the FDIC as "adequately capitalized." As of December 31, 1996, Pacific Thrift's regulatory capital levels have increased to levels meeting the FDIC's definition of "well capitalized;" however, due to the existence of the MOU requiring Pacific Thrift to maintain certain capital levels, it is still classified as "adequately capitalized." See "SUPERVISION AND REGULATION -- Federal Law -- Capital Adequacy Guidelines." ASSET/LIABILITY MANAGEMENT The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's "interest rate sensitivity gap". An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would generally tend to adversely affect net interest income while a positive gap would generally tend to result in an increase in net interest income. During a period of declining interest rates, a negative gap would generally tend to result in increased net interest income while a positive gap would generally tend to adversely affect net interest income. At December 31, 1996, total interest-earning assets maturing or repricing during each period exceeded total interest-bearing liabilities maturing or repricing in the same periods by $7.5 million, representing a positive cumulative interest rate sensitivity gap ratio of 10%. However, because interest rates for different asset and liability products offered by depository institutions respond differently to changes in the interest rate environment, the gap is only a general indicator of interest rate sensitivity. Pacific Thrift actively monitors its interest rate risk. Pacific Thrift has an asset/liability committee which includes its President, Chief Financial Officer and Deposit Operations Manager. The Board or Directors of Pacific Thrift reviews interest rate risk position on a monthly basis. To the extent consistent with its interest rate spread objectives, Pacific Thrift attempts to reduce its interest rate risk and has taken a number of steps to match its interest sensitive assets and liabilities to minimize the potential negative impact of changing interest rates. Pacific Thrift has focused on making adjustable rate loans, virtually all of which adjust quarterly, and focuses its investment activity on short-term obligations of banks and U.S. government securities. 48 49 The following table sets forth the interest rate sensitivity of Pacific Thrift's assets and liabilities at December 31, 1996 on the basis of certain assumptions. Except as stated below, the amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of the repricing timing or contractual term of the asset or liability. Pacific Thrift has assumed that its savings accounts (passbook accounts and money market accounts), which totaled $24.7 million at December 31, 1996 reprice immediately. Certificates of deposit are included in the table below at their dates of maturity. Certain shortcomings are inherent in the method of analysis presented in the following table. For example, interest rate floors on some adjustable rate loans can have the effect of increasing the net interest income as interest rates decline or, conversely, limiting increases in net interest income as interest rates rise. Also, loan prepayments and early withdrawal of certificates of deposit could cause the interest sensitivities to vary from what appears in the table. Finally, the ability of many borrowers to service their adjustable rate debt may be adversely affected by an interest rate increase. INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 1996 (Dollars in Thousands)
After Assets or Liabilities Which 1 Day 3 Months Six Months 1-5 5 Mature or Reprice to 3 Months to 6 Months to 1 Year Years Years Total --------------------------- ----------- ----------- --------- ----- ----- ----- Cash and Investments................. 7,947 7,947 Variable Rate Loans Receivable....... 31,630 31,630 Fixed Rate Loans Receivable.......... 258 226 147 776 1,803 3,210 Loans Held for Sale (1).............. 30,727 30,727 ------ ---------- --------- ------ ------ ------ Interest-earning assets............ 70,562 226 147 776 1,803 73,514 ------ ---------- --------- ------ ------ ------ Certificates of deposit.............. 14,451 19,745 22,147 56,343 Savings accounts..................... 24,659 24,659 ------ ---------- --------- ------ ------ ------ Interest-bearing liabilities....... 39,110 19,745 22,147 0 0 81,002 ------ ---------- --------- ------ ------ ------ Interest rate sensitivity gap........ 31,452 (19,519) (22,000) 776 1,803 (7,488) Cumulative interest rate sensitivity 31,452 (11,933) (10,067) (9,291) (7,488) (7,488) gap Interest rate sensitivity ratio (2).. 1.80 .01 .01 .00 .00 .91 Cumulative interest rate sensitivity gap ratio (3)...................... .45 (.17) (.14) (.13) (.10) (.10)
(1) Includes loans sold by each month end, for which cash has not yet been received. (2) The interest rate sensitivity gap ratio represents total interest-earning assets divided by total interest-bearing liabilities. (3) The cumulative interest rate sensitivity gap ratio represents the cumulative interest rate sensitivity gap divided by total interest-earning assets. 49 50 IMPACT OF INFLATION AND CHANGING PRICES The financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations of the Company and its subsidiaries. Like most mortgage companies and industrial loan companies, nearly all the assets and liabilities of the Company and Pacific Thrift are monetary. As a result, interest rates have a greater impact on the Company's consolidated performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. EFFECT OF NEW ACCOUNTING STANDARDS In December 1991, the Financial Accounting Standards Board (FASB) issued its Statement of Financial Accounting Standards No. 107 ("SFAS 107") "Disclosures About Fair Value of Financial Instruments." SFAS 107 requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial condition, for which it is practicable to estimate fair value. SFAS 107 is effective for fiscal years ending after December 15, 1995, for entities with less than $150 million in total assets, as of its December 1991 issuance date. The adoption of SFAS 107 did not have a material impact on the Company's financial statements. In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 applies to all loans except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, loans measured at fair value or a lower of cost or fair value, leases, and debt securities as defined in SFAS No. 115. SFAS No. 114 requires that impaired loans be valued at the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair market value of the collateral if the loan is collateral dependent. SFAS No. 114 is effective for fiscal years beginning after December 15, 1994, with earlier adoption encouraged. SFAS No. 114 applies primarily to the loan portfolio. The Company actively monitors this portfolio and evaluates the net realizable value of any loan which is deemed to be impaired. Net realizable value is assessed based upon current appraised value of the underlying collateral. If carrying value exceeds this estimated realizable value, carrying value is reduced to the estimated realizable value by a charge to earnings. As such, SFAS No. 114 does not represent a material change from the Company's prior accounting practices and did not have a material effect on the reported financial results of the Company. In October, 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 118 amends Statement No. 114 to allow a creditor to use existing methods for recognizing interest income 50 51 on impaired loans and also amends the disclosure requirements of Statement No. 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to these impaired loans. SFAS No. 118 is effective concurrent with the effective date of Statement 114, that is, for financial statements for fiscal years beginning after December 15, 1994. As with Statement No. 114, management believes it is following the requirements of SFAS No. 118. In March, 1995, the FASB used SFAS No. 121 "Accounting for the impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of." SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the entity should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. This Statement is effective for financial statements for fiscal years beginning after December 15, 1995. Earlier application is encouraged. Restatement of previously issued financial statements is not permitted. Impairment losses resulting from the application of this Statement should be reported in the period in which the recognition criteria are first applied and met. The initial application of this Statement to assets that are being held for disposal at the date of adoption should be reported as the cumulative effect of a change in accounting principle. The adoption of SFAS 121 did not have a material impact on the Company's financial statements. In May, 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65." SFAS No. 122 requires that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. A mortgage banking enterprise that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values if it is practicable to estimate those fair values. If it is not practicable to estimate the fair values of the mortgage servicing rights and the mortgage loans (without the mortgage servicing rights), the entire cost of purchasing or originating the loans should be allocated to the mortgage loans (without the mortgage servicing rights) and no cost should be allocated to the mortgage servicing rights. This Statement requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. A mortgage banking enterprise should stratify its mortgage servicing rights that are capitalized after the adoption of this Statement based on one or more of the predominant risk characteristics of the 51 52 underlying loans. Impairment should be recognized through a valuation allowance for each impaired stratum. This Statement applies prospectively in fiscal years beginning after December 15, 1995, to transactions in which a mortgage banking enterprise sells or securitizes mortgage loans with servicing rights retained and to impairment evaluations of all amounts capitalized as mortgage servicing rights, including those purchased before the adoption of this Statement. Earlier application is encouraged. Retroactive capitalization of mortgage servicing rights retained in transactions in which a mortgage banking enterprise originates mortgage loans and sells or securitizes those loans before the adoption of this Statement is prohibited. The effect of the adoption of SFAS No. 122 was not material to the Company, primarily because the Company sells all of its loans on a servicing released basis. In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a method of accounting for stock compensation plans based on fair value of grants made under such plans on the date of grant using certain option-pricing models. SFAS No. 123 allows companies to continue to account for their stock option plans in accordance with APB Opinion 25 "Accounting for Stock Issued to Employees," which provides for an intrinsic valuation model that recognizes only the difference between the fair market value of a company's stock and the price paid to acquire the stock under the stock compensation plan. However, SFAS No. 123 encourages the adoption of the fair value accounting method. Companies electing not to follow the new fair value based method are required to provide expanded footnote disclosures, including pro forma net income and earnings per share, determined as if the company had applied the new method. SFAS No. 123 is required to be adopted prospectively beginning January 1, 1996. Management has accounted for grants under the Company's stock option plan under the intrinsic value method allowed under APB Opinion 25 and has provided the footnote disclosure required by SFAS No. 123 in its financial statements included elsewhere herein. In 1966, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on consistent application of a financial components approach that focuses on control. SFAS No. 125 applies to transactions occurring after December 31, 1996. The adoptment of SFAS No. 125 is not expected to have a material impact on the Company's financial condition or results of operations. 52 53 SEASONALITY The Company's results of operations have not been materially affected by seasonality. FORWARD LOOKING STATEMENTS The discussion in this Report contains certain forward-looking statements. Actual future results could differ materially from those described in the forward-looking statements as a result of factors discussed below. The Company cautions the reader, however, that these lists of risk factors may not be exhaustive. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. RELIANCE ON PRIMARY LOAN PURCHASERS. The Company sells loans for securitization primarily to Aames and Advanta. If sales to either or both of these purchasers were discontinued, there can be no assurance that agreements with new purchasers would be as favorable as current arrangements with Aames and Advanta. RELIANCE ON CONTINUING SECURITIZATIONS. The Company has been able to substantially increase its lending volume as a direct result of its ability to sell for securitization substantial amounts of its new loan production. Any change in the market for securitized subprime residential loans could have an adverse impact the Company's ability to continue to increase or maintain the growth of its mortgage banking business. COMPETITION IN THE LENDING INDUSTRY. The subprime residential mortgage industry is undergoing consolidation and increased competition, which may reduce profit margins on the Company's lending business and may also have an adverse impact the Company's ability to continue to increase or maintain the growth of its mortgage banking business. EXPOSURE TO INTEREST RATE RISK. Significant reductions in interest rates may change the prepayment rates, and accordingly impact the excess spread received by the Company on loans sold by it to Aames and Advanta. In addition, the Company's profitability on portfolio loans may be adversely affected by rapid changes in interest rates. RISKS OF REAL PROPERTY SECURED LENDING. In the subprime residential mortgage business, lenders rely upon low loan-to-value ratios to provide realizable value in collateral used to secure loans. However, the liquidation value of real property collateral may be adversely affected by a number of factors, including general economic conditions, regional economic conditions, natural disasters, environmental contamination and governmental regulation. GOVERNMENT REGULATION. Pacific Thrift is subject to extensive governmental supervision, regulation and control. See "BUSINESS - Supervision and Regulation." 53 54 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14(a) 1-2. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On September 12, 1995, the Company dismissed Ernst & Young LLP ("E&Y") as independent certified public accountants of the Company and its subsidiaries, and engaged BDO Seidman LLP ("BDO") as independent certified public accountants of the Company and its subsidiaries. E&Y has not reported on the Company's financial statements for the past two years. In 1995, there was a disagreement between the Company and E&Y concerning the scope of the work necessary to be performed by E&Y in connection with a proposed restructuring of the Company, including procedures and issues raised with respect to the allowance for loan losses, deferred tax asset and other transactions recorded by the Company in its unaudited financial information as of June 30, 1995. Prior to resolving the disagreement, the client-auditor relationship was terminated by the Company. The Company discussed the subject matter of the disagreement with E&Y, and authorized E&Y to respond fully to all inquiries of BDO, the Company's successor accountants, concerning the subject matter of the disagreement. Prior to the engagement of BDO as the independent accountants for the Company and its subsidiaries, the Company did not consult BDO concerning the application of accounting principles to any specified transaction or any matter that was the subject of a disagreement with E&Y or a reportable event. 54 55 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item with respect to directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the information contained in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on July 10, 1997, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31 1996. Information with respect to executive officers is included in Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the information contained in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on July 10, 1997, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the information contained in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on July 10, 1997, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the information contained in the Proxy Statement relating to the Annual Meeting of Shareholders to be held on July 10, 1997, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31 1996. 55 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) List of Financial Statements Financial Statements required to be filed hereunder are indexed on page 58 hereof. (a)(2) List of Financial Statement Schedules None. (a)(3) List of Exhibits The exhibits required to be filed hereunder are indexed on page S-1 hereof. (b) The Company filed a Report on Form 8-K for December 31, 1996, during the last quarter of 1996. 56 57 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on March 29, 1997. PACIFICAMERICA MONEY CENTER, INC. By: /s/ JOEL R. SCHULTZ ---------------------------------------- Joel R. Schultz, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Registration Statement has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated.
Signature Capacity Date --------- -------- ---- /s/ JOEL R. SCHULTZ Director, Chief Executive March 29, 1997 - ------------------------------ Officer and Chairman of the Joel R. Schultz Board /s/ RICHARD D. YOUNG Director and Executive Vice March 29, 1997 - ------------------------------ President Richard D. Young /s/ CHARLES J. SIEGEL Chief Financial and March 29, 1997 - ------------------------------ Accounting Officer Charles J. Siegel /s/ RUSSELL G. ALLISON Director March 29, 1997 - ------------------------------ Russell G. Allison /s/ JAMES C. NEUHAUSER Director March 29. 1997 - ------------------------------ James C. Neuhauser /s/ PAUL D. WEISER Director March 29, 1997 - ------------------------------ Paul D. Weiser
58 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES
Independent Certified Public Accountant's Report F-1 Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 F-6 Consolidated Statements of Changes in Stockholders' Equity/Partners' Capital for the years ended December 31, 1996, 1995 and 1994 F-9 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-10 Notes to Consolidated Financial Statements for the years ended December 31, 1996, 1995 and 1994 F-13 Supplemental material Schedule I - Consolidating Schedule - Financial Position - December 31, 1996 F-65 Schedule II - Consolidating Schedule - Operations - year ended December 31, 1996 F-67 Schedule III - Consolidating Schedule - Financial Position - December 31, 1995 F-69 Schedule IV - Consolidating Schedule - Operations - year ended December 31, 1995 F-71 Schedule V - Consolidating Schedule - Operations - year ended December 31, 1994 F-73
59 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT To the Stockholders PacificAmerica Money Center, Inc. (formerly Presidential Mortgage Company, a California Limited Partnership) We have audited the accompanying consolidated balance sheets of PacificAmerica Money Center, Inc. and subsidiaries (collectively, the Company) (formerly Presidential Mortgage Company, a California Limited Partnership) as of December 31, 1996 and 1995 and the related consolidated statements of operations, changes in stockholders' equity/partners' capital, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PacificAmerica Money Center, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the two years then ended, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information in Schedules I, II, III and IV is presented for the purpose of additional analysis of the consolidated financial statements rather than to present the financial position and results of operations of the individual companies. The consolidating information in Schedules I, II, III and IV has been subjected to the auditing procedures applied to the audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. BDO SEIDMAN, LLP Los Angeles, California March 21, 1997 F-1 60 INDEPENDENT AUDITOR'S REPORT To the Partners Presidential Mortgage Company We have audited the consolidated statements of operations, changes in partner's capital, and cash flows for the year ended December 31, 1994, of Presidential Mortgage Company (the Partnership) and subsidiaries (collectively, the Company). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1994 consolidated financial statements referred to above present fairly, in all material respects, the results of the Company operations and its cash flows for the year ended December 31, 1994, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information in Schedule V is presented for the purpose of additional analysis of the consolidated financial statements rather than to present the results of operations of the individual companies. The consolidating information in Schedule V has been subjected to the auditing procedures applied to the audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has suffered losses from nonperforming loans that, combined with other factors, resulted in significant recurring losses from operations. As discussed in Note 7, the Partnership is subject to substantial debt service and other requirements of the note payable to its lender. F-2 61 As discussed in Notes 19 and 20, at October 31, 1994, the Partnership's wholly owned subsidiary, Pacific Thrift and Loan Company (Pacific Thrift), was considered to be "critically undercapitalized" under the Prompt Corrective Action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 because its tangible and leverage capital ratios fell below 2%. As a result of such designation, Pacific Thrift was subject to severe restrictions on its activities. At December 31, 1994, Pacific Thrift was no longer considered to be "critically undercapitalized," but still did not meet the minimum capital requirements to be considered "adequately capitalized" by the Federal Deposit Insurance Corporation (FDIC). Also at December 31, 1994, Pacific Thrift had a deficiency in its net worth, based on requirements of the California Financial Code and the California Department of Corporations (DOC). As a result of its capital designation, Pacific Thrift was required to submit a capital restoration plan, including a guarantee by the Partnership, to the FDIC. In addition, Pacific Thrift consented to a new comprehensive Order to Cease and Desist (the new C&D) by the FDIC and DOC. The new C&D requires that Pacific Thrift take various actions, including significantly increasing its leverage capital ratio to 8% by September 30, 1995. Failure to implement the capital restoration plan and meet the capital requirements of the new C&D would expose Pacific Thrift to various regulatory actions, including the risk of regulatory takeover. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans regarding these matters are discussed in Notes 1 and 20. Note 12 indicates management's description of certain litigation in which allegations of securities fraud and aiding and abetting in the breach of fiduciary duty have been made against the Partnership and its Chief Executive Officer (CEO) by investors in companies affiliated with the Partnership until 1984. Management denies these allegations, states that they are without merit, and represents that any claims are barred by applicable statutes of limitation. Counsel for both the Partnership and CEO have stated that they are unable to provide an opinion as to the outcome of the litigation. The accompanying consolidated financial statements do not include any provisions or adjustments which might result from the outcome of the uncertainties discussed above. Ernst & Young LLP April 7, 1995 except as to Note 20 to the consolidated financial statements which is as of May 20, 1995 F-3 62 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------- ASSETS CASH AND CASH EQUIVALENTS (Note 2D) $ 8,640,000 $ 10,489,000 ACCOUNTS RECEIVABLE (Note 18) 2,349,000 3,337,000 RECEIVABLE FOR MORTGAGE LOANS SHIPPED (Notes 2F and 10) 24,310,000 - ACCRUED INTEREST RECEIVABLE 1,144,000 903,000 PREMIUM RECEIVABLE FOR LOANS SOLD (Note 10) 1,195,000 - LOANS RECEIVABLE (Notes 2E, 2G, 3, and 7) 33,515,000 43,908,000 LOANS HELD FOR SALE, at cost which approximates market (Notes 2H and 3) 18,148,000 12,577,000 RECEIVABLE FROM RELATED PARTY (Notes 9 and 10) - 347,000 EXCESS YIELD RECEIVABLE (Notes 2I, 2M and 3) 11,698,000 2,725,000 OTHER REAL ESTATE (Notes 2N and 4) 4,285,000 3,156,000 PROPERTY AND EQUIPMENT (Notes 2O and 5) 2,360,000 1,398,000 GOODWILL (Notes 2P and 11) - 1,808,000 DEFERRED INCOME TAXES, net of valuation allowance (Notes 2Q and 8) 4,995,000 1,612,000 REFUNDABLE INCOME TAXES 730,000 - OTHER ASSETS 1,565,000 684,000 - ------------------------------------------------------------------------------------------------------------------- $ 114,934,000 $ 82,944,000 - -------------------------------------------------------------------------------------------------------------------
F-4 63 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL THRIFT CERTIFICATES PAYABLE (Note 6) Full-paid certificates $ 56,343,000 $ 35,881,000 Installment certificates 24,659,000 24,275,000 - ------------------------------------------------------------------------------------------------------------------- Total thrift certificates payable 81,002,000 60,156,000 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,235,000 4,018,000 ACCRUED INTEREST PAYABLE 185,000 273,000 PAYABLE TO RELATED PARTY (Note 10) - 281,000 MORTGAGE NOTES PAYABLE (Note 4) 1,557,000 611,000 NOTES PAYABLE (Note 7) 3,290,000 6,771,000 DEFERRED INCOME TAXES (Notes 2Q and 8) 4,699,000 387,000 NOTE PAYABLE TO RELATED PARTY (Note 7) - 600,000 PARTNERSHIP WITHDRAWALS PAYABLE (Note 15) - 1,120,000 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 92,968,000 74,217,000 - ------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 12, 13, 14, and 19) - ------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS EQUITY (Note 16) Preferred stock, $.01 par value, shares authorized 2,000,000; none issued and outstanding - - Common stock, $.01 par value, shares authorized 8,000,000; issued and outstanding 1,870,150 19,000 - Additional paid-in capital 17,400,000 - General partner warrants 385,000 - Retained earnings 4,162,000 - PARTNERS' CAPITAL (Note 16) General partner - (84,000) Limited partners' capital - 8,811,000 - ------------------------------------------------------------------------------------------------------------------- Total Stockholders equity/Partners' capital 21,966,000 8,727,000 - ------------------------------------------------------------------------------------------------------------------- $ 114,934,000 $ 82,944,000 ===================================================================================================================
See accompanying notes to consolidated financial statements. F-5 64 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans receivable (Notes 2E, 2G and 3) $ 11,174,000 $ 8,885,000 $ 11,003,000 Deposits with financial institutions 328,000 692,000 401,000 - ------------------------------------------------------------------------------------------------------------------- Total interest income 11,502,000 9,577,000 11,404,000 - ------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Thrift certificates greater than $100,000 23,000 7,000 28,000 Other thrift certificates 4,391,000 3,813,000 2,917,000 Notes payable 552,000 1,379,000 1,982,000 - ------------------------------------------------------------------------------------------------------------------- Total interest expense 4,966,000 5,199,000 4,927,000 - ------------------------------------------------------------------------------------------------------------------- Net interest income 6,536,000 4,378,000 6,477,000 PROVISION FOR LOAN LOSSES (Notes 2E, 2G and 3) 1,151,000 3,289,000 6,096,000 - ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 5,385,000 1,089,000 381,000 - ------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Other income 777,000 545,000 1,125,000 Gain on sales of loans (Note 2I): Excess yield 9,617,000 2,437,000 301,000 Premium 19,600,000 6,458,000 645,000 - ------------------------------------------------------------------------------------------------------------------- Total noninterest income 29,994,000 9,440,000 2,071,000 - -------------------------------------------------------------------------------------------------------------------
F-6 65 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits (Notes 10 and 14) 14,622,000 6,000,000 4,755,000 General and administrative (Note 10) 12,019,000 5,194,000 5,833,000 Related party fees (Notes 9 and 10) 872,000 1,012,000 805,000 Operations of other real estate (Note 4) 681,000 1,212,000 732,000 Depreciation and amortization 714,000 893,000 747,000 - ------------------------------------------------------------------------------------------------------------------- Total noninterest expense 28,908,000 14,311,000 12,872,000 - ------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 6,471,000 (3,782,000) (10,420,000) INCOME TAXES (BENEFIT) (Notes 2Q and 8) 1,658,000 (1,223,000) 1,000 - ------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 4,813,000 (2,559,000) (10,421,000) INCOME FROM DISCONTINUED OPERATIONS 387,000 861,000 907,000 LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (Note 18) (1,038,000) - - - ------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 4,162,000 $ (1,698,000) $ (9,514,000) - -------------------------------------------------------------------------------------------------------------------
F-7 66 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1996 - ------------------------------------------------------------------------------- EARNINGS PER SHARE - PRIMARY: Continuing operations $ 2.27 Discontinued operations (.28) - ------------------------------------------------------------------------------- Net income $ 1.99 - ------------------------------------------------------------------------------- EARNINGS PER SHARE - FULLY DILUTED: Continuing operations $ 2.12 Discontinued operations (.28) - ------------------------------------------------------------------------------- NET INCOME $ 1.84 - ------------------------------------------------------------------------------- PRO FORMA SUPPLEMENTAL EARNINGS AND PER SHARE - INFORMATION FROM CONTINUING OPERATIONS (NOTE 2(C)) (UNAUDITED): Pro forma income taxes $ 2,718,000 Pro forma net income $ 3,753,000 Pro forma net income per share: Primary $ 1.81 Fully diluted $ 1.67
See accompanying notes to consolidated financial statements. F-8 67 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL
Years Ended December 31, 1995 and 1994 - ------------------------------------------------------------------------------------------------------------------- PARTNERS' CAPITAL, December 31, 1993 $ 19,939,000 Net loss - 1994 (9,514,000) - ------------------------------------------------------------------------------------------------------------------- PARTNERS' CAPITAL, December 31, 1994 10,425,000 Net loss - 1995 (1,698,000) - ------------------------------------------------------------------------------------------------------------------- PARTNERS' CAPITAL, December 31, 1995 $ 8,727,000 - -------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 -------------------------------------------------------------------------------------- Number Additional General Partner of Common Paid-In Partner Retained Interests Shares Stock Capital Warrants Earnings Total - --------------------------------------------------------------------------------------------------------------------------------- Balance January 1, 1996 $ 8,727,000 - $ - $ - $ - $ - $ 8,727,000 Partner interest converted to stock (8,727,000) 890,000 9,000 8,718,000 - - - Rights offering - 324,628 3,000 3,243,000 - - 3,246,000 Partners cash out - (285,560) (3,000) (2,853,000) - - (2,856,000) Fractional shares paid - (1,206) - (12,000) - - (12,000) General partner warrants - - - 385,000 - 385,000 Public offering, net - 878,210 9,000 7,612,000 - - 7,621,000 Warrants exercised - 10,958 - 162,000 - - 162,000 Employee stock purchase plan - 53,120 1,000 530,000 - - 531,000 Net income - - - - - 4,162,000 4,162,000 - --------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity, December 31, 1996 $ - 1,870,150 $ 19,000 $17,400,000 $ 385,000 $4,162,000 $21,966,000 - ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-9 68 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 4,162,000 $ (1,698,000) $ (9,514,000) Adjustments to reconcile net income (loss) to net cash used in operating activities: Loss on disposal of discontinued operations 1,038,000 - - Provision for loan losses 1,151,000 3,289,000 6,096,000 Changes in discontinued operations 1,034,000 486,000 251,000 Provision for losses on other real estate 337,000 1,188,000 202,000 Net gain on sale of other real estate (224,000) (469,000) (625,000) Proceeds from sale of loans originated for sale 337,563,000 145,266,000 29,315,000 Originations of loans held for sale (335,471,000) (151,538,000) (41,055,000) Depreciation and amortization 834,000 919,000 776,000 Net change in assets and liabilities: Accounts receivable (282,000) 1,548,000 (1,803,000) Loan sale premium (1,195,000) - - Accrued interest receivable (241,000) 222,000 966,000 Receivable for mortgage loans shipped (24,310,000) - - Receivable from related party 347,000 131,000 316,000 Excess yield receivable (8,973,000) (1,837,000) 7,000 Goodwill - (172,000) (127,000) Other assets (1,611,000) (267,000) (383,000) Deferred income taxes 929,000 (1,225,000) - Payable to related party (881,000) 126,000 (528,000) Accounts payable, accrued expenses, and accrued interest payable 2,854,000 (864,000) 50,000 - ----------------------------------------------------------------------------------------------------------- Net cash used in operating activities (22,939,000) (4,895,000) (16,056,000) - -----------------------------------------------------------------------------------------------------------
F-10 69 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of portfolio loans 26,176,000 13,371,000 28,402,000 Increase in loans receivable (29,697,000) (12,325,000) (10,249,000) Proceeds from sale of other real estate 5,652,000 14,253,000 5,994,000 Proceeds from sale of discontinued operations net assets (1,180,000) - - Mortgage assumed (repaid) in connection with other real estate (847,000) (1,702,000) 536,000 Purchase of property and equipment (1,791,000) (489,000) (877,000) - ------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (1,687,000) 13,108,000 23,806,000 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in thrift certificates 20,846,000 (9,345,000) 7,080,000 Borrowings under line of credit 3,000,000 - - Repayment of line of credit (3,000,000) - - Paydowns of note payable (6,026,000) (8,007,000) (8,422,000) Decrease in participations payable (1,120,000) - - Public offering, net 7,621,000 - - Rights offering 3,246,000 - - Partners cash out (2,856,000) - - Fractional shares payout (12,000) - - General partner warrants 385,000 - - Exercise of warrants 162,000 - - Stock purchase employee plans 531,000 - - - ------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 22,777,000 (17,352,000) (1,342,000) - -------------------------------------------------------------------------------------------------------------------
F-11 70 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31, 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,849,000) (9,139,000) 6,408,000 CASH AND CASH EQUIVALENTS, at beginning 10,489,000 19,628,000 13,220,000 - --------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, at end $ 8,640,000 $10,489,000 $19,628,000 - --------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for Interest $ 5,054,000 $ 5,331,000 $ 4,704,000 Income taxes 668,000 2,000 1,000 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Loans transferred to other real estate $ 6,894,000 $10,489,000 $ 7,542,000 Mortgage payable assumed in connection with other real estate 1,793,000 1,545,000 2,499,000 Loans to facilitate sales of other real estate 311,000 895,000 898,000 - ---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-12 71 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL ORGANIZATION On June 27, 1996, PacificAmerica Money Center, Inc., (the "Corporation" or "Company") a Delaware Corporation, formed in 1994 as a wholly owned subsidiary of Presidential Mortgage Company, and Presidential Mortgage Company, a California limited partnership (the "Partnership") completed a Restructuring Plan dated May 1, 1996 (the "Restructuring"), whereby all of the assets and liabilities of the Partnership were transferred to the Corporation in exchange for common stock of the Corporation (the "Common Stock"). The Common Stock was distributed to the partners of the Partnership, pro rata in accordance with their capital accounts in the Partnership. In accordance with the terms of the Restructuring Plan, the consent of a majority of limited partners to the Restructuring Plan was solicited pursuant to a Proxy Statement/Prospectus dated May 14, 1996, and the consent of approximately 75% of all limited partners was obtained by June 17, 1996, the expiration of the solicitation period. Every limited partner was given the right to elect to receive cash in lieu of shares of the Corporation (the "Cash Out Option"), in an amount equal to $10 per share times the number of shares that would have been received by that partner based on their capital account in the Partnership. Pursuant to the Restructuring Plan, 603,234 shares of Common Stock were issued to partners of the Partnership (other than partners accepting the Cash Out Option) for their interests in the Partnership and $2,855,600 was paid by the Corporation to partners electing the Cash Out Option. Also pursuant to the terms of the Restructuring Plan, Presidential Management Company, the general partner of the Partnership (the "General Partner") purchased 563,333 warrants ("General Partner Warrants") for a purchase price of $385,000. The General Partner Warrants are each exercisable for one share of Common Stock at a purchase price of $15.00 per share from June 27, 1996 until December 27, 1997. The General Partner Warrants are nontransferable, except to and between partners of the General Partner. F-13 72 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL (CONTINUED) ORGANIZATION (Continued) Concurrently with the solicitation of consent pursuant to the Proxy Statement/Prospectus dated May 16, 1996, all partners of the Partnership, together with all partners of the General Partner, and all officers, directors, proposed directors and employees of the Partnership, all of its subsidiaries and the Corporation, were given the right to purchase additional shares of Common Stock (the "Rights Offering") at a purchase price of $10 per share. A total of 324,628 shares were subscribed for and issued in the Rights Offering. For every five shares subscribed for in the Rights Offering, a subscriber also received one warrant ("Subscriber Warrants"). A total of 64,925 Subscriber Warrants were issued in connection with the Rights Offering, each exercisable from June 27, 1996 until June 27, 1998, for one share of Common Stock at a purchase price of $12.50 per share. Pursuant to a Prospectus dated June 24, 1996, the Corporation also conducted a public offering of additional shares of Common Stock at $10 per share (the "Public Offering"). A total of 878,210 shares were issued in the Public Offering, including 114,549 shares in connection with the exercise of an over-allotment option by the underwriter of the Public Offering. The Corporation issued a total of 1,806,072 shares of Common Stock in connection with the Restructuring Plan, the Rights Offering and the Public Offering. The shares of Common Stock were listed for trading on the Nasdaq National Market under the symbol "PAMM." Trading in the stock commenced on June 25, 1996. Concurrently with the closing of the Restructuring, the Rights Offering and the Public Offering on June 27, 1996, the Partnership filed certificates of dissolution and liquidation with the California Secretary of State. F-14 73 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL (CONTINUED) ORGANIZATION (Continued) The Restructuring has been accounted for as a change in legal organization but not in the enterprise of the Partnership. Therefore, the financial statements of the Corporation give effect to the Restructuring as a recapitalization of the Partnership into the Corporation. References to the Corporation in the financial statements refer to the financial condition and results of operations of the Partnership on a consolidated basis for all periods prior to June 27, 1996. From the date of its formation in 1981 until 1988, the Partnership's sole business was the direct origination and servicing of real estate secured loans under California consumer and commercial finance lender licenses. In 1988, the Partnership formed Pacific Thrift and Loan Company, a California corporation ("Pacific Thrift"), as a wholly owned subsidiary, to engage in the business of origination, purchase and sale of real estate secured loans under a California thrift and loan license. Pacific Thrift also issues deposits insured by the Federal Deposit Insurance Corporation ("FDIC"), and is therefore subject to regulation by both the FDIC and the California Department of Corporations. Since 1990, substantially all new lending activity has been conducted by Pacific Thrift. In recent years, the Company has been primarily engaged in mortgage banking activities and as such originates and sells mortgage loans to investors in the secondary markets. The Company's ability to continue to originate loans is dependent, in part, upon its ability to sell loans in the secondary market in order to generate cash proceeds for new origination. The value of and market for the Company's loans are dependent upon a number of factors, including general economic conditions, interest rates and governmental regulations. Adverse changes in such factors may affect the Company's ability to sell loans for acceptable prices within reasonable periods of time. A prolonged, substantial reduction in the size of the secondary market for loans of the types originated by the Company may adversely affect the Company's ability to sell loans with a consequent adverse impact on the Company's profitability and ability to fund future originations which could have a material adverse effect on the Company's financial position and results of operations. F-15 74 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL (CONTINUED) ORGANIZATION (Continued) The Company also owns another subsidiary, PacificAmerica Lending, Inc. ("PAL"), formed for the purpose of engaging in the lending business under a California finance lender's license and other state licenses where management deems it appropriate. Immediately after the restructuring the Company contributed net assets of $2,920,000 to PAL at book value. As of the date hereof, PAL has not engaged in significant loan production, but it may become more active in the future, depending upon business requirements. Pacific Thrift focuses on the origination of residential real estate loans to borrowers whose credit histories and/or other factors limit their ability to qualify for lower-rate financing at more credit sensitive financial institutions. Such loans are generally referred to in the lending industry as "sub-prime" or "B"/"C" credit loans. In 1994, Pacific Thrift began to originate loans for the purpose of sale and securitization. Loan production has continued to increase as Pacific Thrift has steadily expanded its geographic lending areas. As of January 31, 1997, Pacific Thrift is authorized to originate loans in nearly every state of the United States. Pacific Thrift believes that it will continue to expand its lending business in states in which it has only recently commenced lending operations, or in those states in which it has not yet commenced lending operations. The Partnership also owned substantially all of the interests in three subsidiaries engaged in the trust deed foreclosure services and posting and publishing businesses, Consolidated Reconveyance Company ("CRC"), a California limited partnership, Lenders Posting and Publishing Company ("LPPC"), a California limited partnership, and Consolidated Reconveyance Corporation ("CRCWA"), a Washington corporation. The Corporation acquired all of the Partnership's interests in these entities in connection with the Restructuring. Effective December 31, 1996, all of the assets and liabilities of CRC and LPPC and all of the stock of CRCWA were sold (Note 18). This is part of the Company's strategy to concentrate all of its financial and human resources on its primary business of residential lending for sale and securitization. F-16 75 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL (CONTINUED) ORGANIZATION (Continued) The Partnership's general partner, Presidential Management Company, was a California limited partnership. Presidential Management Company's general partner, Presidential Services Corporation, was a California corporation owned by Joel R. Schultz, John A. DeRosa and Constance DeRosa. The Partnership's limited partners consisted of approximately 2,500 individuals and entities in classes A, B, C, D, and E. The differences between the various classes primarily related to the different offering dates and unit prices as well as profit priorities and percentages. In addition, certain partners elected to reinvest their distributions in Distribution Reinvestment Plan (DRP) Units. PARTNERSHIP AGREEMENT The Partnership was governed by the Fifth Amended and Restated Certificate and Agreement of Limited Partnership entered into as of September 1989, as amended by the First Amendment, dated as of May 1993, and the Second Amendment, dated as of January 1, 1994. The First Amendment provided for a special allocation of loss to the general partner and income to the limited partners based on certain capital contributions by the general partner from 1993 through 1996 (the "Capital Plan"). The Second Amendment provided that Pacific Thrift would directly hire its own employees and directly pay its own overhead and that the Partnership would continue to pay the general partner for fees in connection with loans of Pacific Thrift and the Partnership. The agreement and amendments were collectively referred to as the "Partnership Agreement." In accordance with the Partnership Agreement, the net profits of the Partnership (after deduction of the management fee) were allocated to the partners, based on specified annual percentage rates for each class of partners and the average daily balance of each partner's capital contributions. Net losses were allocated to all partners in proportion to their average daily capital contributions. In addition, there was a special allocation based on the Capital Plan. F-17 76 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL (CONTINUED) PARTNERSHIP AGREEMENT (Continued) The Partnership Agreement provided certain rights to the partners to withdraw the balance in their capital accounts. Such withdrawal rights were restricted by certain percentage limitations and a determination by the general partner that such withdrawal would not impair the capital or operations of the Partnership. Since July 1993, no distributions were made and no withdrawals were permitted. OPERATING RESULTS AND BUSINESS PLAN In 1996 the Company had income from continuing operations of $4,813,000 and net income of $4,162,000. In prior years the Company has suffered losses from operations of the Partnership, from 1992 through 1995 and Pacific Thrift from 1992 through 1994. These losses resulted primarily from significant amounts of nonperforming loans, large provisions for loan losses, and relatively high levels of overhead and caused a substantial reduction in the capital of the Company. While that portion of the losses attributable to Pacific Thrift had caused it to become "undercapitalized" and subject to certain regulatory mandates at the end of 1994, Pacific Thrift had net profits of $7,054,000 and $3,155,000 for the years ended December 31, 1996 and 1995 and was classified as "adequately capitalized" as of September 30, 1995. Management expects that Pacific Thrift will continue to be profitable for 1997 and believes that Pacific Thrift is in total compliance with all regulatory mandates. Management also expects that the Company will be profitable in 1997. In prior years the Company was limited by conditions imposed by the lender under a note payable (Note 7). The note payable to its lender was fully repaid in January 1997. F-18 77 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF ACCOUNTING These consolidated financial statements are prepared in accordance with generally accepted accounting principles. B. CONSOLIDATION The consolidated financial statements include the accounts of the Corporation, Pacific Thrift, PacificAmerica Lending, CRC, LPPC and CRC Washington. All significant intercompany balances and transactions have been eliminated. Consolidating information is presented in Schedules I, II, III, IV and V. On December 31, 1996 CRC, LPPC and CRC Washington were sold (Note 18). C. EARNINGS PER SHARE Primary earnings per common share are net earnings divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options and warrants. The modified treasury method was used which limits the number of shares of common stock obtainable upon exercise of outstanding options and warrants to 20% of the number of common shares outstanding at the end of the period for which the computation is being made. All options and warrants are assumed to be exercised and proceeds in excess of the funds used to repurchase the above-mentioned 20% of common shares outstanding are applied to reduce debt and any remaining funds invested in U.S. government securities with recognition of any income tax effect. Fully diluted earnings per common share reflect the maximum dilution that would have resulted from the exercise of stock options and warrants under the modified treasury method. F-19 78 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. EARNINGS PER SHARE (Continued) Pro forma earnings per common share assumes the Company is taxed for federal and state income tax purposes as a taxable corporation at a 42% effective tax rate and is computed on the basis of weighted average shares of common stock and equivalents using the modified treasury stock method. This pro forma information is provided to show the expected ongoing effect of the Company's change in tax treatment as a result of the Restructuring (Note 1). Weighted average common shares and equivalents used for the above 1996 computations was 2,293,850. D. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. E. LOANS RECEIVABLE Loans receivable are stated at the principal amount outstanding, less unamortized deferred fees and costs and the allowance for loan losses (ALLL). Loans receivable are primarily secured by first and second trust deeds. Interest income is accrued as earned and is based on the principal balance outstanding. The Company's policy is to cease accruing interest on loans that are more than two monthly payments past due and for which there appears to be insufficient collateral to support collectibility. In many cases, interest, late fees, and other charges continue to accrue until the time management deems that such amounts are not collectible. When a loan is placed on a nonaccrual status, the Company reverses all accrual income that is uncollected income. F-20 79 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. LOANS RECEIVABLE (Continued) Nonrefundable loan fees and direct costs associated with the origination of loans are deferred and netted against outstanding loan balances. The net deferred fees and costs are recognized in interest income over the loan term as an adjustment to the yield, using a method that approximates the effective interest (level yield) method. F. RECEIVABLE FOR MORTGAGE LOANS SHIPPED Gain or loss on the sale of mortgage loans is recognized at the date the loans are sold to investors and all title and rights to such loans are legally conveyed to investors pursuant to existing sales agreements. G. ALLOWANCE FOR LOAN LOSSES Loan losses are charged to the ALLL; recoveries are credited to the ALLL. The provision for loan losses charged to expense and added to the ALLL is based upon management's judgment and evaluation of the known and inherent risks in the loan portfolio. Management's judgment takes into consideration such factors as changes in the nature and volume of the portfolio, continuing review of delinquent loans, current economic conditions, risk characteristics of the various categories of loans, and other pertinent factors that may affect the borrower's ability to repay. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan (as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures). The effect of adopting this new accounting standard was immaterial to the operating results of the Company for the year ended December 31, 1995. Prior financial statements are prohibited from restatement to apply the new accounting standard. F-21 80 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. ALLOWANCE FOR LOAN LOSSES (Continued) Under the new accounting standard, a loan is considered to be impaired when it is probable that the Company will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. The ALLL related to loans identified as impaired is primarily based on the excess of the loan's current outstanding principal balance over the estimated fair market value of the related collateral. For a loan that is not collateral-dependent, the allowance is recorded at the amount by which the outstanding principal balance exceeds the current best estimate of the future cash flows on the loan discounted at the loan's effective interest rate. Prior to 1995, the ALLL for all loans which would have qualified as impaired under the new accounting standard was primarily based upon the estimated fair market value of the related collateral. For impaired loans that are on non-accrual status, cash payments received are generally applied to reduce the outstanding principal balance. However, all or a portion of a cash payment received on a non-accrual loan may be recognized as interest income to the extent allowed by the loan contract, assuming management expects to fully collect the remaining principal balance of the loan. A restructuring of a debt is considered a troubled debt restructuring when the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise grant. Troubled debt restructuring may include changing repayment terms, reducing the stated interest rate and reducing the amounts of principal and/or interest due or significantly extending the maturity date. The restructuring of a loan is intended to recover as much of the Company's investment as possible and to achieve the highest yield possible. F-22 81 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. LOANS HELD FOR SALE The Company has designated certain of its loans receivable as being held for sale. In determining the level of loans held for sale, the Company considers the extent to which loans will be required to be sold in response to liquidity needs, asset/liability management requirements, and other factors. Loans held for sale are recorded at the lower of cost or market value. Any unrealized losses are recorded as a reduction in income. Realized gains and losses from the sale of loans receivable are based on the specific identification method. I. LOAN SALES REVENUE RECOGNITION The Company principally derives its revenue from sales premium and excess loan yield gains. Loans originated through the Company's retail and wholesale network are funded by the Company for sale in the secondary market. Gains on the sale of mortgage loans are recognized at the date the loans are sold to investors and all title and rights to such loans are legally conveyed to investors pursuant to existing sales agreements. Loans are generally sold on a servicing-released basis. An excess loan yield gain is recorded to account for the yield retained by the Company and is determined by the Company taking into account several factors including industry practices. The net present value of the yield retained by the Company (based on certain prepayment and other assumptions to determine an expected life of the loan) is recorded as an excess yield gain when the loan is sold. The excess yield gain included in the Statements of Operations includes these amounts reduced by direct transaction costs. The excess yield receivable included in the Balance Sheets results from the recording of such initial gains on an aggregate basis adjusted for amortization. F-23 82 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) I. LOAN SALES REVENUE RECOGNITION (Continued) As the Company receives cash in the form of the excess yield it retains, the excess yield receivable will be reduced in proportion to and over the expected lives of the related loans giving effect to the prepayment assumption utilized in its determination. On a quarterly basis, the Company will review its prepayment and other assumptions in relation to its actual experience and current rates of prepayment prevalent in the industry. The excess yield receivable will be written down if a short-fall in the net present value of the estimated remaining future excess yield becomes apparent. The excess yield receivable will not be increased as a result of slower than estimated prepayment experience. The premium earned from whole loans originated and subsequently sold at par plus an upfront premium, with no further rights to any excess yield, are reported as premium under gain on sale of loans in the Statements of Operations. J. MORTGAGE SERVICING RIGHTS In 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65." SFAS No. 122 requires the Corporation to capitalize mortgage servicing rights on originated mortgage loans when the loans are originated to be sold or securitized and servicing is retained. When a mortgage loan is originated to be sold with servicing retained, the total cost of the loan is allocated to the mortgage servicing right and the loan based on their relative fair values. Under SFAS No. 122, capitalized servicing rights are assessed for impairment based on the fair value of those rights. In addition, capitalized mortgage servicing rights must be stratified based on one or more predominant risk characteristics of the underlying loans and impairment is recognized through a valuation allowance for each impaired stratum. The effect of the adoption of SFAS No. 122 was not material to the Company, primarily because the Company sells substantially all of its loans on a servicing released basis. F-24 83 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) K. TRANSFERS AND SERVICING OF FINANCIAL ASSETS In 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on consistent application of a financial- components approach that focuses on control. SFAS No. 125 applies to transactions occurring after December 31, 1996. The adoption of SFAS No. 125 is not expected to have a material impact on the Company's financial condition or results of operations. L. IMPAIRMENT OF LONG-LIVED ASSETS In 1996, the Company adopted SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which addresses accounting for impairment of long-lived assets, including certain identifiable intangibles, and goodwill related to those assets. SFAS No. 121 requires that assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121 did not have a material impact on the Company's financial condition or results of operations. M. EXCESS YIELD RECEIVABLE Excess yield receivable represents the excess of the estimated present value of net amounts to be received over normal servicing fees for loan sales for which the Company continues to service the loans. Excess yield receivable also represents the estimated present value of the excess interest income to be received over the yield acquired by the investor for loan sales for which the Company does not continue to service the loans. The receivable is amortized to operations based on a method which approximates the effective interest method. F-25 84 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) N. OTHER REAL ESTATE Other real estate is comprised of formally foreclosed property to which the Company does not have legal title. These assets are recorded at the lower of the net investment in the loan or the fair value of the property less selling costs. At the time of foreclosure, any excess of the net investment in the loan over its fair value is charged to the allowance for loan losses. Any subsequent declines in value are charged to operations. Prior to 1995, loans were classified as in-substance foreclosures when they exhibited characteristics more closely associated with the risk of real estate ownership than with loans. Collateral that has been classified as an in-substance foreclosure was reported in the same manner as collateral that has been formally foreclosed. Effective January 1, 1995, with the adoption date of SFAS No. 114, the category of loan classified as in-substance foreclosures was eliminated resulting in such loans being reflected as loan receivable rather than as foreclosed real estate. O. PROPERTY AND EQUIPMENT Property and equipment is stated at cost, less accumulated depreciation. Depreciation of property and equipment is based on the asset's estimated useful life, ranging from two to eight years, and is computed using the straight-line method. Expenditures that improve or extend the service lives of assets are capitalized. Repairs and maintenance are charged to expense as incurred. P. GOODWILL Goodwill represented the excess of the total purchase price (consisting of the initial consideration and subsequent consideration) of CRC and LPPC over the fair value of purchased net assets. Goodwill was amortized using the straight-line method over approximately 20 years. The Company sold CRC and LPPC in 1996 and wrote off the remaining goodwill which is included in loss from discontinued operations in the Consolidated Statement of Operations (Note 18). F-26 85 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Q. INCOME TAXES The Company follows the "asset and liability" method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for tax consequences of "temporary differences" by applying enacted statutory tax rates to differences between the financial statement carrying amount and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. All tax benefits are recorded and then reduced by a valuation allowance when it is more likely than not that the benefit is not fully realizable. Partnerships are generally not subject to income taxes, accordingly, the Partnership income or loss was reported in the individual partners' tax returns. However, Pacific Thrift, the Partnership's wholly owned corporate subsidiary, has always been subject to federal income and state franchise taxes. Since completion of the Restructuring (Note 1) the Company is also subject to federal and state income taxes. R. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments (SFAS 107), requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments. The estimated fair values of financial instruments are disclosed as of December 31, 1996. SFAS No. 107 defines fair value as the amount which the instrument could be exchanged for in a current transaction between willing parties, other than in a forced sale or liquidation. Where possible, the Company has utilized quoted market prices to estimate fair value. Since quoted market prices were not available for a significant portion of the financial instruments, the fair values were approximated using discounted cash flow techniques. Fair value estimates are made at a specific point in time, based on judgments regarding future expected loss experience, current economic conditions, risk conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium F-27 86 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates were based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The following presents the carrying value and estimated fair value of the various classes of financial instruments held by the Company at December 31, 1996. This information is presented solely for compliance with SFAS No. 107 and is subject to change over time based on a variety of factors. Because no market exists for a significant portion of the financial instruments presented below and the inherent imprecision involved in the estimation process, management does not believe the information presented reflects the amounts that would be received if the Company's assets and liabilities were sold.
December 31, 1996 ---------------------------------- Carrying Estimated Value Fair Value - --------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 8,640,000 $ 8,640,000 Loans receivable 35,979,000 35,859,000 Allowance for loan losses (2,464,000) (2,464,000) - --------------------------------------------------------------------------- Total loans 33,515,000 33,395,000 - --------------------------------------------------------------------------- Loans held for sale 18,148,000 18,984,000 Excess yield receivable 11,698,000 11,698,000
F-28 87 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
December 31, 1996 ---------------------------------- Carrying Estimated Value Fair Value - --------------------------------------------------------------------------- LIABILITIES Installment certificates 24,659,000 24,659,000 Fully-paid certificates 56,343,000 56,215,000 Notes payable 3,290,000 3,290,000 Mortgage notes payable 1,557,000 1,557,000
Cash, Short Term-Investments, Trade Receivables, and Trade Payables The carrying amount approximates fair value because of the short maturity of these instruments. Loans Fair values were estimated for portfolios of loans with similar financial characteristics. Loans were segregated by type such as commercial real estate, residential mortgage, and other consumer. Each loan category was further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value for performing fixed rate commercial real estate loans was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The fair values for performing commercial real estate loans indexed to a market lending rate with normal credit risk were assumed to approximate their carrying value. For residential mortgage loans, fair value was estimated by using quoted market prices for loans with similar credit and interest rate risk characteristics. F-29 88 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Loans (Continued) Fair value for significant nonperforming loans was based on recent external appraisals or broker price opinions adjusted for anticipated credit loss risk, estimated time for resolution, and other related resolution costs. If appraisals or recent broker price opinions are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Loans Held for Sale The fair values were estimated by using current institutional purchaser yield requirements. Excess Yield Receivable The fair value was determined by using estimated discounted future cash flows taking into consideration current prepayment rates and default experience. The carrying amount is considered to be a reasonable estimate of fair market value. Thrift Certificates Payable Under SFAS 107, the fair value of deposits with no stated maturity, such as savings and money market accounts, is equal to the amount payable on demand as of December 31, 1996. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. F-30 89 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Thrift Certificates Payable (Continued)
At December 31, 1996 -------------------- Carrying Estimated Value Fair Value ============================================================================= Installment certificates $24,659,000 $24,659,000 ============================================================================= Fully-paid certificates: Maturing in six months or less 34,196,000 34,129,000 Maturing between six months and one year 22,147,000 22,086,000 Maturing between one and three years - - - ----------------------------------------------------------------------------- Total fully-paid certificates $56,343,000 $56,215,000 =============================================================================
Notes Payable and Mortgage Notes Payable The fair values for long-term debt are based on quoted market prices where available. If quoted market prices are not available, fair values are estimated using discounted cash flow analyses based on the Company's borrowing rates at December 31, 1996 for comparable types of borrowing arrangements. F-31 90 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The remaining assets and liabilities of the Company are not considered financial instruments and have not been valued differently than is customary under historical cost accounting. Since assets and liabilities that are not financial instruments are excluded, the difference between total financial assets and financial liabilities does not, nor is it intended to, represent the market value of the Company. Furthermore, the estimated fair value information may not be comparable between financial institutions due to the wide range of valuation techniques permitted, and assumptions necessitated, in the absence of an available trading market. S. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. T. STOCK-BASED COMPENSATION In 1996, the Company adopted for footnote disclosure purposes only, SFAS No. 123, "Accounting for Stock-Based Compensation," which requires that companies measure the cost of stock-based employee compensation at the grant date based on the value of the award and recognize this cost over the service period. The value of the stock-based award is determined using the intrinsic value method whereby compensation cost is the excess of the quoted market prices of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. F-32 91 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) U. RECLASSIFICATIONS Certain reclassifications of balances from prior years have been made to conform to the current year's reporting format. 3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES LOANS RECEIVABLE Loans receivable at December 31, 1996 and December 31, 1995 are summarized as follows:
December 31, 1996 1995 =============================================================================== Real estate loans $ 61,487,000 $ 82,815,000 Participations sold (24,914,000) (33,792,000) - ------------------------------------------------------------------------------- Total real estate loans - net $ 36,573,000 $ 49,023,000 =============================================================================== Loans receivable held for investment $ 36,573,000 $ 49,023,000 Net deferred loan fees and costs (594,000) (886,000) Allowance for loan losses (2,464,000) (4,229,000) - ------------------------------------------------------------------------------- $ 33,515,000 $ 43,908,000 ===============================================================================
F-33 92 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) The components of the loan portfolio at December 31, 1996 and December 31, 1995 were as follows:
December 31, 1996 1995 ================================================================================ One-to-four family residential $14,479,000 $14,672,000 Five-or-more family residential 9,308,000 10,347,000 Home improvement 1,322,000 1,743,000 Commercial 10,732,000 20,387,000 Land and other 732,000 1,874,000 - -------------------------------------------------------------------------------- $36,573,000 $49,023,000 ================================================================================
During 1996 and 1995, the Company sold, without recourse to the Company, approximately $26,176,000 and $13,371,000 of portfolio mortgage loans. SIGNIFICANT CONCENTRATIONS OF RISK The Company made portfolio mortgage loans primarily secured by first or second trust deeds on Southern California real estate. The loans are secured by single-family residential and other types of real estate and collateralized by the equity in the borrowers' real estate. Prior to the fourth quarter of 1993, these borrowers generally had a credit standing such that the Company relied heavily on the value of the underlying collateral in its lending practices. In the fourth quarter of 1993, however, the Company began implementing a revised policy to place more emphasis on the creditworthiness of the borrower. Loans are expected to be repaid either by cash from the borrower at maturity or by borrower refinancing. In the fourth quarter of 1996 the Company stopped portfolio lending in order to concentrate its financial and human resources on its primary business of residential lending for sale and securitization. F-34 93 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31, 1996, 1995 and 1994 are as follows:
Years ended December 31, -------------------------------------------------- 1996 1995 1994 =============================================================================== Balances at beginning $ 4,229,000 $ 4,307,000 $ 3,123,000 Provision charged to expense 1,151,000 3,289,000 6,096,000 Loan charge-offs (2,916,000) (3,367,000) (4,912,000) - ------------------------------------------------------------------------------- Balance at end $ 2,464,000 $ 4,229,000 $ 4,307,000 ===============================================================================
At December 31, 1996 and 1995, loans with more than two monthly payments past due and on nonaccrual status totaled $2,649,000 and $1,128,000. If interest on these loans had been accrued, interest income would have increased by approximately $235,000 and $151,000 in 1996 and 1995. At December 31, 1996 and 1995, loans with more than two monthly payments past due and on accrual status totaled $1,722,000 and $1,508,000. Interest income recognized on these loans totaled approximately $95,000 and $130,000 in 1996 and 1995. The following information relates to the Company's impaired loans which includes troubled debt restructuring that meet the definition of impaired loans as of and for the year ended December 31, 1996:
December 31, 1996 ================================================================================ Impaired loans with a specific allowance $1,648,000 Impaired loans with no specific allowance 617,000 - -------------------------------------------------------------------------------- Total impaired loans $2,265,000 Total allowance related to impaired loans $ 229,000 Average balance of impaired loans for the period $2,951,000 Interest income on impaired loans for the period recorded on a cash basis $ 307,000
F-35 94 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) PLEDGING OF COMPANY LOANS RECEIVABLE In connection with a bank loan, the Partnership had pledged all of its loans receivable as security to its lender. The lender was fully repaid in January 1997 (Note 7). LOANS HELD FOR SALE Loans held for sale at December 31, 1996 and 1995 are summarized as follows:
December 31, 1996 1995 ================================================================================ Real estate loans $ 18,148,000 $ 12,577,000 ================================================================================
In December 1993, management developed a loan securitization program under which the Corporation or Pacific Thrift could sell certain loans receivable to a primary buyer (the Purchaser). The securitization agreements provided that the Corporation or Pacific Thrift would offer to sell all newly originated qualifying loans, up to $75,000,000, to the Purchaser through June 1995. Pacific Thrift had sold $75 million of loans under that agreement as of May 26, 1995. All loans sold by Pacific Thrift were included in pools of loans securitized by the Purchaser, who also acts as loan servicer for each of the pools. All loans were sold nonrecourse except for the obligation to repurchase any loan which did not meet certain customary representations and warranties or to repurchase loans adversely affected by any breach of general representations and warranties. Except for an initial sale of approximately $3.9 million in loans, all loans sold by Pacific Thrift to the Purchaser were sold for a premium above face value. Pacific Thrift received a servicing released fee payable quarterly on the principal amount F-36 95 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) LOANS HELD FOR SALE (Continued) of each loan sold from September 19, 1994 to January 1995. Effective February 1, 1995, the servicing released fee was increased on the principal amount of each loan sold, including the loans sold from September 1994 to May 26, 1995, until each loan is paid off. Pacific Thrift retains an interest in the net spread (i.e. all interest and fees paid on the loans less servicing and other costs) in the $3.9 million of loans sold to Purchaser in December 1993, which management estimates will represent an additional return of approximately 3.3% on the principal amount of the $3.9 million of loans sold. Pacific Thrift entered into a new agreement with the Purchaser effective June 21, 1995, pursuant to which it agreed to continue selling pre-approved residential loans to the Purchaser. The new agreement provided for Pacific Thrift to receive a higher premium on the face amount of each loan sold which met preset interest rate requirements upon date of sale. An additional premium was paid for all loans sold during any quarter if at least $22.5 million of loans were sold during that quarter. The premium for all loans sold in excess of $25 million per calendar quarter was further increased. In addition, Pacific Thrift received a servicing released fee on the principal amount of each loan sold, payable on a quarterly basis, until the loan is paid off. At January 1, 1996, the Agreement was revised to eliminate, for all new loans sold, the servicing released fee and replace it with a higher premium on sale. F-37 96 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) LOANS HELD FOR SALE (Continued) On October 31, 1996, the Company entered into a new agreement with the Purchaser. For all loans sold after September 30, 1996, the Company sells these loans to the Purchaser and receives par value; interest payments less a servicing fee and warehousing fee from the date of sale until the loans are securitized; certain premium and/or advance payments upon securitization; and further future payments based on the excess yield on the loans sold. On December 16, 1996, the Company entered into a similar agreement with a Second Purchaser of loans effective for all loans sold after November 30, 1996. To the extent that the Company or one of its subsidiaries originates loans for sale, it bears an interest rate risk between the loan approval date and the date that each loan is securitized. In addition, because subprime residential loans have a higher interest rate spread than prime residential loans, fluctuations in rates which may occur during the period prior to securitization could reduce the excess spread anticipated to be retained by the Company upon securitization, but would not generally be sufficiently large to eliminate the excess spread entirely. Loans which are held for sale during the period prior to sale are accounted for at the lower of cost or market value of such loans. During 1996, the Company sold an aggregate of $277 million of pre-approved securitizable loans to the Purchaser, and $61 million of pre-approved securitizable loans to the Second Purchaser. F-38 97 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) LOANS HELD FOR SALE (Continued) Prior to March 31, 1993, Pacific Thrift originated Title I home improvement loans that were 90% insured by the Federal Housing Administration, provided that the total amount of claims did not exceed 10% of the amount of all Title I loans. During 1995, Pacific Thrift sold $1,126,000 of these loans and recorded no losses. As of March 31, 1993, Pacific Thrift discontinued the origination and sale of Title I and other similar loans. In August 1995 Pacific Thrift resumed a Title I Loan origination program, in which Pacific Thrift acts exclusively as a correspondent lender for one or more larger mortgage lenders who securitize Title I Loans. These loans were then sold without recourse. During 1995, Pacific Thrift sold $1,126,000 of seasoned home improvement loans originated prior to March 1993 at par value and $850,000 in new Title I loans at a premium. 4. OTHER REAL ESTATE Other real estate consisted of the following at December 31, 1996 and 1995:
December 31, 1996 1995 =============================================================================== Foreclosed real estate $ 6,570,000 $ 5,590,000 Allowance for losses on other real estate (2,285,000) (2,434,000) - ------------------------------------------------------------------------------- $ 4,285,000 $ 3,156,000 ===============================================================================
F-39 98 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. OTHER REAL ESTATE (CONTINUED) Changes in the allowance for losses on other real estate for the years ended December 31, 1996, 1995 and 1994 are as follows:
Years ended December 31, --------------------------------------------- 1996 1995 1994 ================================================================================ Balance at beginning $2,434,000 $ 402,000 $ 783,000 Provisions for losses 337,000 1,188,000 202,000 Net (charge-offs) recoveries (486,000) 844,000 (583,000) - -------------------------------------------------------------------------------- Balance at end $2,285,000 $2,434,000 $ 402,000 ================================================================================
Operations of other real estate for the years ended December 31, 1996, 1995 and 1994 consisted of the following:
Years ended December 31, ------------------------------------------------- 1996 1995 1994 ================================================================================ Provision for losses $ 337,000 $1,188,000 $ 202,000 Net (gain) on sales (224,000) (469,000) (625,000) Other expenses 568,000 493,000 1,155,000 - ------------------------------------------------------------------------------- $ 681,000 $1,212,000 $ 732,000 ================================================================================
Upon foreclosure of a junior lien, the Company takes title to the real estate, subject to existing senior liens. These mortgage notes payable totaled $1,557,000 and $611,000 at December 31, 1996 and 1995. F-40 99 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31, 1996 and 1995:
December 31, 1996 1995 =============================================================================== Computer and office equipment $ 2,157,000 $ 1,211,000 Furniture and fixtures 897,000 745,000 Leasehold improvements 621,000 519,000 - ------------------------------------------------------------------------------- 3,675,000 2,475,000 Accumulated depreciation and amortization (1,315,000) (1,077,000) - ------------------------------------------------------------------------------- $ 2,360,000 $ 1,398,000 ===============================================================================
6. THRIFT CERTIFICATES PAYABLE Thrift certificates are comprised of full-paid certificates and installment certificates. The approximate weighted average interest rate of full-paid and installment certificate accounts at December 31, 1996 was 5.89% and 5.06%, respectively. The interest payable on the thrift certificates totaled $185,000 and $103,000 at December 31, 1996 and 1995. At December 31, 1996 and 1995, full-paid thrift certificates consisted of the following:
December 31, 1996 1995 ============================================================================ Certificates greater than $100,000 $ -- $ -- Certificates less than $100,000 56,343,000 35,881,000 - ---------------------------------------------------------------------------- $56,343,000 $35,881,000 ============================================================================
F-41 100 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. THRIFT CERTIFICATES PAYABLE (CONTINUED) At December 31, 1996, scheduled maturities of full-paid thrift certificates were as follows:
Amount ================================================================================ Less than 3 months $14,451,000 3 to 6 months 19,745,000 6 to 12 months 22,147,000 1 to 5 years -- - -------------------------------------------------------------------------------- $56,343,000 ================================================================================
7. NOTES PAYABLE Notes payable consisted of the following at December 31, 1996 and 1995:
1996 1995 ================================================================================ Bank loan, repaid January 1997 (a) $ 745,000 $6,771,000 Excess yield advance (b) 2,545,000 -- - -------------------------------------------------------------------------------- $3,290,000 $6,771,000 ================================================================================
(a) As of December 31, 1995, the Partnership was in compliance with all paydown requirements under a September 1994 amended and restated loan agreement with its bank lender, but certain technical conditions relating to expenses had not been met. The Bank agreed to waive this technical violation of the loan agreement in February, 1996. The loan interest rate was prime plus 1.5%, which was 9.75% at December 31, 1996. (b) The excess yield advance of $2,545,000 was received in December 1996 from the Purchaser (Note 4) of loans sold under which an excess yield is retained by the Company. As part of the agreement an advance of 4.75% of the par value of loans sold was made by the Purchaser when the loans were securitized. The advance is reduced by any monthly payments to be made against the excess yield receivable until the advance is fully repaid. The advance bears an annual interest rate of LIBOR plus 2.5%. F-42 101 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES The Partnership was not subject to income taxes. However, the Partnership was still required to file partnership returns in order to report its income or loss in total as well as the distributable share of income or loss of each of the partners. These partnership returns, as all tax returns, are potentially subject to examination by the taxing authorities. The cumulative differences between the total capital of the Partnership for financial reporting purposes and the total capital reported for federal income tax purposes at December 31, 1995 are summarized as follows:
December 31, 1995 ================================================================================ Total partners' capital for financial reporting purposes $ 8,780,000 Investment in Pacific Thrift, syndication costs, bad debt and real estate reserves, and various other differences 14,030,000 - -------------------------------------------------------------------------------- Total partners' capital for federal income tax purposes $22,810,000 ================================================================================
Subsequent to the restructuring (Note 1) the Corporation became subject to federal income and California franchise taxes. Pacific Thrift, the major operating subsidiary, was always subject to income taxes because it has been a taxable corporation from its inception. Significant components of the provision for income taxes (benefits) from continuing operations included in the consolidated statements of operations are as follows:
1996 1995 1994 ================================================================================ Current $ 727,000 $ -- $1,000 Deferred 931,000 (1,223,000) -- - -------------------------------------------------------------------------------- $ 1,658,000 $(1,223,000) $1,000 ================================================================================
F-43 102 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows:
December 31, 1996 1995 ================================================================================== Deferred tax assets Net operating loss carryforward $2,547,000 $1,361,000 Loan loss reserves 488,000 179,000 State tax deduction 435,000 -- Capital loss carryforward 402,000 -- Reserve for other real estate owned 370,000 365,000 Reserve for delinquent interest 334,000 233,000 Loans held for sale 253,000 220,000 Alternate minimum tax credit carryforward 214,000 -- Organization costs 159,000 -- Deferred rent 137,000 106,000 Depreciation 40,000 -- Other 18,000 5,000 - ---------------------------------------------------------------------------------- Total gross deferred tax assets 5,397,000 2,469,000 Less valuation allowance 402,000 857,000 - ---------------------------------------------------------------------------------- Total net deferred tax assets $4,995,000 $1,612,000 ==================================================================================
December 31, 1996 1995 ================================================================================ Deferred tax liabilities Excess yield on loan sales $4,157,000 $128,000 Deferred loan costs 415,000 225,000 Depreciation 127,000 34,000 - -------------------------------------------------------------------------------- Total deferred tax liabilities $4,699,000 $387,000 ================================================================================
F-44 103 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES (CONTINUED) Included in the deferred tax asset at December 31, 1996 is a capital loss carryforward of $402,000 which is fully reserved for (Note 18). During 1996 the beginning of year valuation allowance of $857,000 was reversed. On June 27, 1996 when the Company went from a non-taxable entity to a taxable entity a valuation allowance of $1,207,000 was recorded against the resulting deferred tax asset of $1,207,000 as management felt it was more likely than not the asset was not realizable at that time. In the fourth quarter of 1996, this valuation allowance of $1,207,000 was reversed because of new contracts entered into with the Purchaser in October 1996 and the Second Purchaser in December 1996 (Note 4). As a result of these contracts management expects sufficient revenue will be generated in the future to use these future temporary deductible differences. At December 31, 1996, the Company has net operating loss carryforwards for federal income tax purposes of approximately $6,298,000 that are available to offset future federal taxable income. These federal net operating losses expire in the years 2009 through 2010. Pacific Thrift has net operating loss carryforwards for California franchise tax purposes of approximately $3,144,000. These California carryforwards expire in the year 2001. Should there occur a 50% ownership change of the Company as defined under Section 382 of the Internal Revenue Code of 1986, the Company's ability to use the net operating losses would be restricted to a prescribed annual amount. The following summarizes the difference between the 1996, 1995 and 1994 provision for income taxes (benefit) from continuing operations and the federal statutory tax rate:
1996 1995 1994 ================================================================================ Federal statutory tax rate 34% 34% (34)% Nonrecognition of net operating loss carryforward -- -- 34 Utilization of net operating loss -- 34 -- Reversal of valuation allowance 19 (32) -- Loss of benefit of former partnership losses 11 -- -- - -------------------------------------------------------------------------------- Effective tax rate (benefit) 26% (32)% 0% ================================================================================
F-45 104 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. ANNUAL MANAGEMENT FEE The general partner received an annual management fee based on the proportion that net profits, before the effects of the management fee, bear to the total capital contributions as defined in the Partnership Agreement. The Partnership Agreement permitted the general partner to calculate the management fee based on annual net income that included loan origination fees generated. During 1995 and 1994, there was no management fee because the Partnership incurred net losses in excess of loan origination fees generated. In 1996 a management fee of $174,000 was paid. During 1993, the general partner received payments of $441,000 on the anticipated annual management fees. Since the general partner ultimately did not earn such fees, the general partner agreed to repay these amounts to the Partnership under a promissory note. No interest was paid or accrued for 1993. However, quarterly principal payments of approximately $110,000 commenced in December 1994 and interest at prime plus 1% was accrued from January 1994 through June 27, 1996 (Note 10). This note was fully repaid in June 1996 in connection with the Restructuring. 10. RELATED PARTIES AND AFFILIATES Accounts receivable from the general partner consisted of the following at December 31, 1995:
December 31, 1995 ================================================================================ Unearned annual management fees $220,000 Amounts due for salaries, rent and overhead 127,000 - -------------------------------------------------------------------------------- $347,000 ================================================================================
Accounts payable to the general partner consisted of the following at December 31, 1995:
December 31, 1995 ================================================================================ Base fee and loan servicing fees $203,000 Contingent consideration in connection with the purchase of CRC and LPPC 78,000 - -------------------------------------------------------------------------------- $281,000 ================================================================================
All amounts owed to the general partner by the Partnership and all amounts owed by the general partner to the Partnership were paid in 1996. F-46 105 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. RELATED PARTIES AND AFFILIATES (CONTINUED) The Partnership had various related party transactions with the following entities: - - PRESIDENTIAL MANAGEMENT COMPANY - Prior to the Restructuring (Note 1) the former general partner of the Partnership received specified fees for serviced performed and reimbursements of certain expenses. Under the Partnership Agreement, the general partner received a base fee of up to 35% of the loan origination fees paid by borrowers to the Partnership or Pacific Thrift. The base fee was 35% of loan origination fees for the Company in 1995 and 35% in 1994. The general partner also received a loan servicing fee of 3/8 of 1% per annum on loans with terms over three years. Amounts charged by the former general partner for services performed and overhead-related expenses for the years ended December 31, 1996, 1995 and 1994 were as follows:
Years ended December 31, -------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Base fee $834,000 $ 767,000 $589,000 Loan servicing fee 125,000 245,000 216,000 - -------------------------------------------------------------------------------- Total fees $959,000 $1,012,000 $805,000 - -------------------------------------------------------------------------------- Salaries and overhead reimbursements $100,000 $ 82,000 $ 90,000 - --------------------------------------------------------------------------------
Under a capital plan adopted by the general partner in 1993, the general partner agreed to contribute, over a three-year period, additional capital up to $1,730,000 if the Company generated certain levels of loan origination fees. Pursuant to the agreement, the general partner contributed $266,000 of the $1,730,000 in late 1993 and early 1994, but did not contribute any additional amounts based on continued operating losses and the level of loan origination fees. The capital plan was dissolved as a result of the restructuring (Note 1). F-47 106 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. RELATED PARTIES AND AFFILIATES (CONTINUED) In connection with an amendment to the loan agreement with the Partnership's bank lender (Note 7), in 1992 the general partner loaned the Partnership $600,000 in subordinated debt, with interest at the prime rate and only repayable upon consent by the lender or at such time as the Partnership repaid all of its outstanding indebtedness to the lender. The general partner was repaid in 1996. Effective January 1, 1994, in order for Pacific Thrift to comply with a section of a regulatory agreement covering payments to affiliates, Pacific Thrift commenced directly employing personnel for loan origination, processing, and servicing. In addition, Pacific Thrift revised its policies for payment of rent and other overhead expenses. As a result, Pacific Thrift terminated reimbursements to the Partnership and general partner for such services and expenses. However, the Partnership continued to pay the general partner for base fees and loan servicing fees of Pacific Thrift in accordance with the Partnership Agreement. During 1994, Pacific Thrift paid and allocated certain salaries and overhead for the Partnership, CRC, and general partner totaling $495,000, $220,000 and $356,000, and was reimbursed on a monthly basis. During 1995, Pacific Thrift paid and allocated certain salaries and overhead for the Partnership, CRC, LPPC and the general partner totaling $386,000, $251,000, $8,000 and $597,000, and was reimbursed on a monthly basis. During 1996, Pacific Thrift paid and allocated certain salaries and overhead for the Partnership, Corporation, PAL, CRC, LPPC and the general partner totaling $159,000, $753,000, $212,000, $6,000 and $174,000 and was reimbursed on a monthly basis. The Partnership incurred salary and employee-related expenses for individuals who perform services for the Partnership and Pacific Thrift and did not own more than a 1% interest in the general partner. The Partnership also incurred these expenses for all individuals who perform F-48 107 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. RELATED PARTIES AND AFFILIATES (CONTINUED) services for CRC and LPPC, regardless of their ownership interest in the general partner. The general partner, however, incurred salary and employee-related expenses for three managing officers who performed services for the Partnership and Pacific Thrift and owned more than a 1% interest in the general partner. - - CONSOLIDATED RECONVEYANCE COMPANY - (CRC) served as a trustee on all trust deeds obtained by the Partnership or Pacific Thrift as security for portfolio loans. Fees paid to CRC were paid by the borrowers. On December 31, 1996 CRC was sold (Note 18). - - OTHER - Prior to the Restructuring a managing officer of the Partnership and stockholder provided legal services in connection with the loan accounts of the Partnership and Pacific Thrift, for which he received $100 from the fees paid by each borrower for legal services related to each loan origination. Total fees of $212,000, $175,000 and $62,000 were paid by the Partnership to the managing officer for the years ended December 31, 1996, 1995 and 1994. A partner with a law firm that provides legal services to the Company is a stockholder of the Company and formerly a partner of the Partnership. Total fees for the services provided to the Company by the law firm were approximately $424,000, $689,000 and $716,000 for the years ended December 31, 1996, 1995 and 1994. A former member of the Board of Directors of Pacific Thrift was paid hourly and contingent fees for services related to the sale of loans under the loan securitization agreement entered into in December 1993. Total fees for the services provided by the board member were $165,000 and $111,000 for the years ended December 31, 1995 and 1994. Former officers of the Company have loans payable to the Company, secured by real estate, totaling approximately $74,000 and $269,000 as of December 31, 1996 and 1995. These loans are included in loans receivable. F-49 108 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. RELATED PARTIES AND AFFILIATES (CONTINUED) Thrift certificates purchased by members of management totaled approximately $174,000 and $63,000 at December 31, 1996 and 1995, on terms slightly more favorable than the terms for unrelated parties. Interest expense on these certificates totaled approximately $8,000 and $2,000 for the years ended December 31, 1996 and 1995. F-50 109 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. RELATED PARTIES AND AFFILIATES (CONTINUED) During 1996 and 1995, the Company paid to Pacific Thrift a loan servicing fee at the rate of 1.5% of the outstanding balances of its loans and other real estate. Such fees totaled $199,000 and $351,000 in 1996 and 1995 and were eliminated in the consolidation. F-51 110 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. PURCHASE OF CRC AND LPPC Effective, July 1, 1990, the Partnership purchased 100% of the limited partnership interests in CRC and LPPC from the general partner for their combined estimated fair market value of $908,000 as determined by an independent appraiser. CRC served as trustee on all trust deeds obtained as security for portfolio loans originated or purchased by the Partnership or Pacific Thrift, as well as trust deeds for many unaffiliated lenders. LPPC published information regarding sales of foreclosed properties. The transaction was treated as a purchase and resulted in goodwill of approximately $651,000. The Partnership also agreed to pay the general partner an additional amount (contingent consideration) annually for five years beginning January 1, 1991. The contingent consideration, based on an amended agreement, was calculated as 50% of the total annual net profits earned by CRC and LPPC in excess of a base profit amount of $465,000. The contingent consideration totaled $172,000 and $224,000 for the years ended December 31, 1995 and 1994, and was treated as an addition to goodwill. Accumulated amortization relating to the goodwill totaled $400,000 and $253,000 at December 31, 1995 and 1994. On December 31, 1996 the Company sold its interests in CRC and LPPC (Note 18). 12. LITIGATION AND UNASSERTED CLAIMS Although they were never been served, the Partnership and its Chief Executive Officer (CEO) received a complaint in October 1993 that named them as defendants, along with four other unaffiliated defendants. The complaint contained allegations of securities fraud and breach of fiduciary duty in connection with companies affiliated with Alexander Spitzer (who, until approximately twelve years ago but not thereafter, was an affiliate of the Partnership and CEO). The complaint was filed by two long-time business associates of Spitzer, including one individual who was a general partner of a Spitzer-affiliated entity and one individual who owned another Spitzer- affiliated entity. The complaint charges all defendants with participation in securities fraud in connection with the sale of securities of the Spitzer entities (although there are no allegations that either the Partnership or CEO participated in the sale of such securities) and charges the Partnership and CEO with aiding and abetting other defendants in a violation of their fiduciary duties to the Spitzer-affiliated entities. The primary facts alleged against the Partnership and CEO are alleged to have occurred in 1984. The Partnership and CEO denied the merits of all allegations stated against them in the complaint. Counsel for both the Partnership and CEO, in a letter dated October 20, 1993, advised counsel for the plaintiffs that the complaint appeared to state no claim on the merits against the Partnership or CEO and that no claims could be stated because of statute of limitations problems. The only response of plaintiffs' counsel, by letter dated November 16, 1993, was to notify all defendants that they had an open extension of time to answer. An earlier class action involving Spitzer-affiliated entities was filed in March 1990 by investors and certain lenders in the bankrupt Spitzer-affiliated entities. Although the Partnership and CEO are discussed in the complaint, neither the Partnership nor CEO has ever been named as a defendant in that class action. The allegations involving the Partnership and CEO in both complaints concern the May 1984 sales of the general partnership interests in the Partnership (which were owned at that time by entities owned by the CEO and a relative of Spitzer) and of the stock of a former affiliated thrift and loan company to a large, unaffiliated mortgage banking group headquartered in the state of New York (the Buyer). The complaints allege that, in connection with the sales to the Buyer, the CEO and Spitzer agreed for the former affiliated thrift and loan company to sell certain allegedly poor-quality loans to other Spitzer-affiliated entities. The complaints further allege that Spitzer and his affiliates engaged in a continuing scheme, both before and after the sales to the Buyer, to lend money and sell real estate to nominees (which did not include the Partnership or CEO), who assertedly purchased the real estate at inflated prices and were guaranteed against loss. F-52 111 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. LITIGATION AND UNASSERTED CLAIMS (CONTINUED) Although not mentioned in either of the two complaints, but based on hearsay contained in a document prepared in 1985, Spitzer allegedly stated that in 1984 the CEO reimbursed Spitzer for the CEO's share of funding such guarantees involving one Spitzer-affiliated entity in 1982 through 1984. The CEO acknowledges that he made payments to Spitzer but has stated that they were for proper purposes. Neither the Partnership nor CEO had any ownership interest in any Spitzer-affiliated entity after the sales to the Buyer in May 1984. However, as a result of loans made to Spitzer-affiliated entities prior to the sales to the Buyer, the Partnership continued to be a creditor to these entities. These loans were substantially performing in accordance with their terms and were considered by management to be well secured until 1989, shortly before certain Spitzer-affiliated entities declared bankruptcy in November 1989. Ultimately, as previously reported, the Partnership wrote off the loans not secured by real estate, disposed of real estate collateral securing one of the loans to the Spitzer-affiliated entities, and recorded losses on these loans in 1990 and 1991 in excess of $3.7 million. The Partnership and CEO denied the merits of the allegations stated against them in the complaints. Management does not believe that any of these matters will result in any material additional losses to the Partnership or any material adjustments to these financial statements. On October 31, 1995 plaintiff's counsel, in the October 1993 complaint which had named the Partnership and its CEO alleging securities fraud and breach of fiduciary duty, as discussed above, filed a request for dismissal without prejudice. The clerk of the Court entered the dismissal as requested on November 2, 1995. 13. COMMITMENTS AND CONTINGENCIES In January and February 1993, the Partnership and Pacific Thrift foreclosed on two loans secured by real estate that contained toxic substances. The real estate was used by the former owners for metal-plating purposes. Remediation was completed on one property in 1995 and on the second property in 1996. Both properties were sold in 1996 for cash and without recourse. The Company conducts its operations from leased facilities. Rental expenses of approximately $1,129,000, $905,000 and $926,000 have been charged to general and administrative expenses in the consolidated statements of operations for the years ended December 31, 1996, 1995 and 1994. At December 31, 1996, the approximate minimum rental commitments under all noncancelable operating leases (which are subject to annual escalations based on the consumer price index) are as follows:
Year Amount ================================================================================ 1997 $1,245,000 1998 1,116,000 1999 1,069,000 2000 1,032,000 Thereafter 1,636,000 - -------------------------------------------------------------------------------- $6,098,000 ================================================================================
At December 31, 1996 and 1995, the Company was servicing Title I loans for others totaling approximately $8,743,000 and $10,744,000. In addition, the Company had filed claims with the Federal Housing Administration that depleted the insurance on these loans during 1994. F-53 112 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) In 1995, in order to facilitate certain real estate loan sales by Pacific Thrift, the Partnership guaranteed one buyer against losses up to $1,800,000. As security for the guarantee, in 1995 the Partnership deposited $237,000 with the buyer. The Corporation entered into employment agreements with five of its officers effective as of the closing date of the Restructuring on June 27, 1996 (Note 1). One employment agreement with the President of CRC, LPPC and CRCWA was terminated effective December 31, 1996 upon the sale of those subsidiaries (Note 18). On January 1, 1997, the Corporation entered into an employment agreement with its Chief Financial Officer. The agreements provide for initial terms ranging from one to three years and all extend automatically for additional one year terms thereafter unless either party gives at least six months written notice of their intentions not to renew. The agreements provide for annual salaries adjusted annually to the cost of living index. The agreements also provide for two of the officers to receive annual bonuses based on a calculation of net pre-tax profits subject to a minimum return on equity. Effective January 1, 1996 Pacific Thrift entered into an employment agreement with an executive vice president for a term of two years and automatically renewing for additional one year terms thereafter unless either party gives at least six months written notice of his intention not to renew. The agreement provides for an annual salary adjusted annually to the cost of living index and an annual bonus based upon net profits earned from wholesale loans originated for sale. FORECLOSURE SERVICES ACTIONS On June 6, 1995, CRC and LPPC were served with a complaint by Consumer Action and two consumers suing both individually and on behalf of the general public in an unfair business practices action filed in the Superior Court of Contra Costa County, California. The complaint named CRC and LPPC, along with thirteen other foreclosure service and foreclosure publishing companies, and alleges that all named defendants charge fees in excess of the statutorily permitted amount for publication of F-54 113 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) FORECLOSURE SERVICES ACTIONS (Continued) notices of trustee sales. The complaint seeks restitution of all excess charges, an injunction against the charging of excessive fees in the future and attorneys fees. In January 1996, LPPC and two other posting and publishing companies were dismissed from the action without prejudice. As of March 20, 1996, a tentative global settlement of the action had been reached, pursuant to which CRC would pay damages in an amount immaterial to the Company as a whole. There can be no assurance that the settlement will be concluded, or that damages in any litigation that might ensue would not be material to the Company. In 1996, CRC was served with a complaint by seven individuals suing both individually and on behalf of the general public in a purported class action filed in the Superior Court of Los Angeles County, California. The Complain names over 50 defendants, including numerous title insurance companies and trust deed services companies, generally alleging that the title insurance companies did not make certain refunds of certain trustee sale guarantee fees ("TSGs") which they were required to make under the terms of a settlement of a previous case (in which CRC was not named), and that the trust deed services companies failed to purchase less costly alternative products, to request and remit refunds in the cost of TSGs or to advise the members of the class of their right to a refund from the title insurance companies. As of March 20, 1996, the court had sustained CRC's demurrer to the complaint, as well as other trustees' demurrers and motions for judgment on the pleadings, and the plaintiffs had been given 20 days to file an amended complaint. At this time, there is no way of determining the exact nature and extent of damages, which will not be able to be specified until the amended complaint has been filed. Management believes, however, based upon consultation with its counsel in this action, that any liability that may be incurred by CRC in this action would be immaterial to the Company as a whole. The Company, Pacific Thrift and PacificAmerica Lending are involved in certain lawsuits and there are claims pending against these entities which management considers incidental to normal operations. The legal responsibility and financial impact with respect to such litigation and claims F-55 114 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) cannot presently be determined. However, management considers that any ultimate liability which would likely arise from these lawsuits and claims would not materially affect the financial position, results of operations or cash flows of the Company. 14. RETIREMENT PLANS The Company implemented a retirement savings plan (defined contribution plan) in 1994. All full-time employees who have completed six months of service and reached age 21 are eligible to participate in the plan. Contributions are made from employee-elected salary deferrals. The Company matches the first 6% of employee contributions to the plan at the rate of $.50 on the dollar. During the years ended December 31, 1996 and December 31, 1995, the Company's contributions to the plan totaled $266,00 and $118,000. The PacificAmerica Money Center, Inc. Supplemental Executive Retirement Plan, effective from June 27, 1996 forward, is an unfunded plan to provide benefits to certain long-term executives officers of the Company. The yearly benefit that a participant will receive at normal retirement (as defined) is based on a formula which takes into account his highest average annual compensation for three consecutive years multiplied by the actual number of years of service (as defined), not to exceed 30. Benefits are reduced by participants' estimated social security and 401(k) benefits. Net period pension cost for 1996 includes the following components: 1996 ================================================================================ Service cost $ 26,000 Interest cost 42,000 Prior service cost 32,000 - -------------------------------------------------------------------------------- $100,000 ================================================================================ Actuarial assumptions are a weighted average discount rate of 7% and a salary progression rate of 5%. F-56 115 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. WITHDRAWALS Partnership withdrawals payable of $1,120,000 at December 31, 1995 represented the capital withdrawals by limited partners that were approved by the general partner but not paid by the Partnership. At December 31, 1995 other limited partners with original capital contributions totaling $9,400,000 had requested withdrawals; however, these requests were not approved. Withdrawals were not paid or approved after July 1993 due to limitations on withdrawals in the Partnership Agreement and the restriction on such withdrawals in the amendments to the Partnership's bank loan. In June 1996 all partnership withdrawals payable were paid. 16. STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL, STOCK OPTIONS AND WARRANTS The changes in general and limited partnership interests for 1994 are as follows:
General Limited Partnership Partnership Interest Interests Total =============================================================================== (Unaudited) (Unaudited) Capital (deficit) - December 31, 1993 $ (4,000) $ 19,943,000 $ 19,939,000 Net loss - 1994 (68,000) (9,446,000) (9,514,000) - ------------------------------------------------------------------------------- Capital (deficit) - December 31, 1994 $(72,000) $ 10,497,000 $ 10,425,000 ===============================================================================
The changes in general and limited partnership interests for 1995 are as follows:
General Limited Partnership Partnership Interest Interests Total =============================================================================== Capital (deficit) - January 1, 1995 $(72,000) $ 10,497,000 $ 10,425,000 Net loss - 1995 (12,000) (1,686,000) (1,698,000) - ------------------------------------------------------------------------------- Capital (deficit) - December 31, 1995 $(84,000) $ 8,811,000 $ 8,727,000 ===============================================================================
F-57 116 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL, STOCK OPTIONS AND WARRANTS (CONTINUED) The Company has a 1995 Stock Option Plan and a 1995 Stock Purchase Plan pursuant to which options to purchase shares of the Company's common stock may be granted to employees. The plans provide that the option price shall not be less than the fair market value of the shares on the date of grant. Under the 1995 Stock Option Plan, the maximum number of shares of Common Stock in respect of which Options may be granted under the Plan (the "Plan Maximum") is 250,000 with an increase of two percent (2%) of the total issued and outstanding shares of the Common Stock on the first day of each subsequent calendar year, up to a maximum 330,000 shares, commencing January 1, 1997. Under the 1995 Stock Purchase Plan a total of 50,000 options may be issued. Options vest ratably over four or five year periods as provided for in each employee's option agreement. At December 31, 1996, there were 233,400 shares reserved for options to be granted under the plans. The following summarizes stock option transactions:
Weighted Average Shares Price Per Share ========================================================================= Outstanding at June 27, 1996 -- -- Granted 240,000 $11.02 Exercised -- -- Cancelled (6,600) $10.83 - ------------------------------------------------------------------------- Outstanding at December 31, 1996 233,400 $11.03 - -------------------------------------------------------------------------
At December 31, 1996 the Corporation had 553,377 general partner warrants outstanding each exercisable for one share of common stock at any time until December 27, 1997 at an exercise price of $15 per share. During the year ended December 31, 1996, 9,956 general partner warrants were exercised. At December 31, 1996 the Corporation had 63,894 subscriber warrants outstanding each exercisable for one share of common stock at any time until June 27, 1998 at an exercise price of $12.50 per share. During the year ended December 31, 1996, 1,002 subscriber warrants were exercised. F-58 117 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL, STOCK OPTIONS AND WARRANTS (CONTINUED) Information relating to stock options at December 31, 1996 summarized by exercise price are as follows (thousands of shares):
Outstanding Exercisable --------------------------------------- ------------------------- Weighted Average Exercise Price ------------------------------ Weighted Average Per Share Shares Life (Year) Exercise Price Shares Exercise Price ============================================================================================ $10.00 to $10.00 205,200 8.88 $ 10.00 27,930 $ 10.00 $12.50 to $22.00 18,900 9.08 13.18 -- -- $22.25 to $22.25 100 9.74 22.25 -- -- $23.50 to $23.50 100 9.78 23.50 -- -- $25.50 to $25.50 100 9.79 25.50 -- -- $26.00 to $26.00 100 9.85 26.00 -- -- $28.00 to $28.00 1,900 9.91 28.00 -- -- $29.00 to $29.00 200 9.91 29.00 -- -- $29.50 to $29.50 100 9.92 29.50 -- -- $30.00 to $30.00 6,700 9.90 30.00 -- -- - -------------------------------------------------------------------------------------------- 233,400 8.94 $ 11.03 27,930 $ 10.00 ============================================================================================
All stock options issued to employees have an exercise price not less than the fair market value of the Company's common stock on the date of grant, and in accordance with accounting for such options utilizing the intrinsic value method there is no related compensation expense recorded in the Company's financial statements. Had compensation cost for stock-based compensation been determined based on the fair value at the grant dates consistent with the method of SFAS 123, the Company's net income from continuing operations and earnings per share from continuing operations for the year ended December 31, 1996 would have been reduced to the pro forma amounts presented below:
1996 - -------------------------------------------------------------------------------- Income from continuing operations As reported $4,813,000 Pro forma $4,713,000
F-59 118 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL, STOCK OPTIONS AND WARRANTS (CONTINUED)
1996 - -------------------------------------------------------------------------------- Earnings per share from continuing operations As reported Primary $ 2.27 Fully diluted 2.12 Pro forma Primary $ 2.23 Fully diluted $ 2.09
The fair value of option grants is estimated on the date of grants utilizing the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996: expected life of options of 5 years, expected volatility of 25%, risk-free interest rates of 6.2%, and a 0% dividend yield. The weighted average fair value at date of grant for options granted during 1996 approximated $3.70 per option. 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The unaudited quarterly results of operations for 1996 and 1995 are as follows (in $000's):
Quarter Ended ----------------------------------------------------- Mar 31, Jun 30, Sept 30, Dec 31, 1996 1996 1996 1996 ======================================================================================================= Interest income $ 2,408 $ 2,512 $ 2,788 $ 3,794 Interest expense 1,227 1,190 1,189 1,360 - ------------------------------------------------------------------------------------------------------- Net interest income 1,181 1,322 1,599 2,434 Provision for loan losses 725 (469) 11 884 Other income 4,813 6,177 7,068 11,936 Other expense 4,879 7,292 7,383 9,354 Income tax benefit (expense) (348) (727) (578) (5)* - ------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 42 (51) 695 4,127 Income (loss) from discontinued operations 237 62 103 (15) Loss on disposal of discontinued operations -- -- -- (1,038) - ------------------------------------------------------------------------------------------------------- Net income $ 279 $ 11 $ 798 $ 3,074 ======================================================================================================= Net income per share Primary N/A $ 0.01 $ 0.39 $ 1.36 Fully diluted N/A N/A $ 0.39 $ 1.34
F-60 119 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
Quarter Ended --------------------------------------------------- Mar 31, Jun 30, Sept 30, Dec 31, 1995 1995 1995 1995 ========================================================================================== Interest income $ 2,612 $ 2,424 $ 2,368 $ 2,173 Interest expense 1,405 1,426 1,248 1,120 - ------------------------------------------------------------------------------------------ Net interest income 1,207 998 1,120 1,053 Provision for loan losses 446 554 861 1,428** Other income 1,643 1,932 2,432 3,433 Other expense 2,853 3,199 3,784 4,474 Income tax benefit 430 84 664 44 - ------------------------------------------------------------------------------------------ Loss from continuing operations (19) (739) (429) (1,372) Income (loss) from discontinued operations 226 203 224 208 - ------------------------------------------------------------------------------------------ Net income (loss) $ 207 $ (536) $ (205) $(1,164) ==========================================================================================
* In the quarter ended December 31, 1996 as a result of continued improved earnings, especially in this quarter, a valuation allowance was reversed as management believes it is more likely than not that the related deferred tax asset will be realized in the near future. ** The increase in the provision for loan losses is primarily a result of an increased general reserve. Management represents that it was not practical to determine whether or not a portion of these additional provisions should have been recorded in earlier quarters. 18. DISCONTINUED OPERATIONS Effective December 31, 1996 the Company's trustee and foreclosure services were discontinued when the assets and liabilities of CRC and LPPC and all of the stock of CRCWA were sold. Accordingly, the operations have been reclassified to present the trustee and foreclosure services as discontinued operations in the Statement of Operations. The Company recorded a fourth quarter 1996 pre-tax and after-tax charge of $1,038,000 for disposition of this segment which comprises a $926,000 loss on the measurement date plus a loss from discontinued operations from the measurement date until the disposal date. The tax benefit of approximately $402,000 from the loss on disposition was fully reserved for as such loss is capital in nature and the Company is unable to quantify the portion of such capital loss benefit which may be ultimately realizable. F-61 120 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. DISCONTINUED OPERATIONS (CONTINUED) Net assets disposed of were $2,674,000 against proceeds of $1,748,000 resulting in a loss of approximately $926,000. The $1,748,000 is included in accounts receivable at December 31, 1996 and $450,000 was received by early February 1997. The remaining $1,298,000 represents a secured promissory note which bears interest at 7% per annum, payable $25,000 per month from April 1, 1997 through March 31, 1999 and thereafter at $9,328.93 per month (includes principal and interest) from April 1, 1999 through March 1, 2012. The Company operated principally in two industries, real estate secured lending (including the origination and sale of loans) and trustee and foreclosure services. A summary of selected financial information by industry segment for 1995 and 1994 is as follows:
Years ended December 31, 1995 1994 ======================================================================================= Revenues Interest and other income from real estate secured lending $ 19,016,000 $ 13,475,000 Fees from trustee 3,826,000 3,931,000 - --------------------------------------------------------------------------------------- Total revenues $ 22,842,000 $ 17,406,000 ======================================================================================= Operating profit (loss) Real estate secured lending $ (3,148,000) $ (9,741,000) Trustee and foreclosure services 747,000 811,000 General expenses (519,000) (583,000) - --------------------------------------------------------------------------------------- Loss before income taxes $ (2,920,000) $ (9,513,000) ======================================================================================= December 31, 1995 1994 ======================================================================================= Identifiable assets Real estate secured lending $ 76,896,000 $ 97,930,000 Trustee and foreclosure services 5,532,000 5,564,000 General assets 129,000 253,000 - --------------------------------------------------------------------------------------- Total assets $ 82,557,000 $ 103,747,000 =======================================================================================
F-62 121 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. REGULATORY MATTERS AND CAPITAL ADEQUACY MEMORANDUM OF UNDERSTANDING AND INITIAL ORDERS TO CEASE AND DESIST WITH THE FEDERAL DEPOSIT INSURANCE CORPORATION AND CALIFORNIA DEPARTMENT OF CORPORATIONS In February 1993, Pacific Thrift, the FDIC, and the California Department of Corporations (DOC) entered into a Memorandum of Understanding (MOU). In connection with the MOU, Pacific Thrift was required to maintain primary capital in an amount that equals or exceeds 7.5% of its total assets; obtain and retain qualified management; notify and obtain approval from the FDIC and the DOC prior to adding any individual to the Board of Director or employing any individual as a senior executive office or Pacific Thrift; eliminate loans classified loss and reduce loans classified substandard to specified levels within a specified period of time; revise, adopt, and implement policies to provide effective guidance and control over Pacific Thrift's lending function; develop, adopt, and implement written policies governing relationships between Pacific Thrift, the Partnership, and other affiliated companies; establish and maintain an adequate reserve for loan losses and develop, adopt, and implement a policy and methodology for determining the adequacy of the reserve for loan losses; formulate and implement a budget for all categories of income and expense; revise, adopt, and implement a written liquidity and funds management policy; maintain assets within certain limits; obtain written consent from the FDIC and DOC prior to paying any cash dividends; refrain from extending additional credit to any borrower who has as loan from Pacific Thrift that has been adversely classified, unless the loan is classified as substandard or doubtful and the proper approval has been obtained; and take certain other actions. As of March 31, 1993, Pacific Thrift's total assets had moderately exceeded the limitation provided in the MOU. In addition Pacific Thrift made certain payments in 1993 to the Partnership in excess of the amounts authorized under the Personnel Services Agreement between Pacific Thrift and the Partnership. The overpayment amount was repaid by the Partnership in April 1993. The Audit Committee of the Board of Directors of Pacific Thrift performed an investigation of the circumstances that allowed the overpayments to occur and determined that such overpayments reflected a weakness in the internal control procedures of Pacific Thrift with respect to intercompany payments. Accordingly, new control procedures were adopted by the Board of Directors of Pacific Thrift to prevent overpayment of any kind by Pacific Thrift to the partnership in the future. In November 1993, the FDIC and DOC terminated the MOU and issued an Order to Cease and Desist (C&D) with the consent of Pacific Thrift. The C&D prohibits Pacific Thrift from paying excessive fees to affiliates in such a manner as to produce operating losses; prohibits Pacific Thrift from including accrued interest in the carrying amount of a property acquired by foreclosure on a loan; prohibits Pacific Thrift from accepting or renewing brokered deposits unless it as adequately capitalized and a waiver is obtained; requires Pacific Thrift to disclose any extensions of credit to executive officers or principal shareholders from a correspondent bank; requires pacific Thrift to prepare and display minimum information in its disclosure statement; requires Pacific Thrift to comply with the limits specified in the California Industrial Loan Company regulations on the amount of outstanding thrift certificates, based on its unimpaired capital and surplus; requires Pacific Thrift to develop a comprehensive asset/liability dependency policy, including establishing a range for, and reducing, the volatile liability dependency ratio; requires Pacific Thrift to adopt and implement a written policy to increase its liquidity; and requires Pacific Thrift to adopt and implement a satisfactory policy governing the relationship between Pacific Thrift and its affiliates and to reduce the payment of management, consulting, and other fees to the affiliates to amounts that are reasonable and necessary for the services. See Note 20 In September 1994, the FDIC issued a second C&D with the consent of Pacific Thrift. The second C&D prohibits Pacific Thrift from operating in such a manner as to produce low earnings; requires Pacific Thrift to refrain from opening any additional offices without the prior written approval of the FDIC; requires Pacific Thrift to formulate and implement a written profit plan; and requires Pacific Thrift to provide the FDIC with a study of the operations and profitability of its loan production office opened in June 1994. See Note 20. CAPITAL ADEQUACY Pacific Thrift is subject to various regulatory capital requirements administered by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly discretionary - actions by the FDIC that, if undertaken, could have a direct material effect on Pacific Thrift's financial statements. The regulations require Pacific Thrift to meet specific capital adequacy guidelines that involve quantitative measures under of Pacific Thrift's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Pacific Thrift's capital classification is also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. F-63 122 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED) CAPITAL ADEQUACY (Continued) Quantitative measures established by regulation to ensure capital adequacy require Pacific Thrift to maintain minimum amounts and ratios of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier 1 and total capital (as defined) to risk-weighted assets (as defined). To be considered adequately capitalized as defined under the Prompt Corrective Action (PCA) provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991, Pacific Thrift must maintain the minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios presented in the table. Pacific Thrift's actual unaudited capital amounts and ratios presented in the table. Pacific Thrift's actual unaudited capital amounts and ratios as of December 31, 1993 were as follows:
Capital Adequacy as of December 31, 1993 (Unaudited) --------------------------------------- Required Actual Amount(Ratio) Amount(Ratio) ---------------- --------------- Tier 1 capital (to average assets) $2,646,000(4.0%) $4,654,000(7.0%) Tier 1 capital (to risk-weighted assets) 2,161,000(4.0%) 4,654,000(8.6%) Total capital (to risk-weighted assets) 4,322,000(8.0%) 5,330,000(9.9%)
Pacific Thrift incurred losses in 1994 and, in December 1994, Pacific Thrift was notified by the FDIC that its tangible capital ratio (tangible capital compared to average total assets) as of October 31, 1994 was less than 2%. Based on the tangible and other capital ratios, Pacific Thrift was considered to be "critically undercapitalized" as defined under the PCA provisions. The PCA notice also stated that the FDIC may be required to place Pacific Thrift in receivership in March 1995. See Subsequent Events, Note 20. As a result of such PCA designation, Pacific Thrift became subject to mandatory requirements as of October 31, 1994, including, but not limited to, a requirement to submit a capital restoration plan to the FDIC and various restrictions on asset growth, acquisitions, new activities and branches, dividend payments, management fees, and executive compensation. Subsequent to October 31, 1994, Pacific Thrift improved its capital position from "critically undercapitalized" to "undercapitalized" as a result of certain capital contributions and loan sales prior to December 31, 1994. Pacific Thrift's actual unaudited capital amounts and ratios as of December 31, 1994 were as follows:
Capital Adequacy as of December 31, 1994 (Unaudited) --------------------------------------- Required Actual Amount(Ratio) Amount(Ratio) ---------------- --------------- Tier 1 capital (to average assets) $3,216,000(4.0%) $3,112,000(3.9%) Tier 1 capital (to risk-weighted assets) 2,301,000(4.0%) 3,112,000(5.4%) Total capital (to risk-weighted assets) 4,602,000(8.0%) 3,831,000(6.7%)
In addition, Pacific Thrift received an Order to Cure Deficiency of Net Worth (Order) from the DOC in connection with a $1,414,000 deficiency in its capital as of December 31, 1994. The Order requires that Pacific Thrift increase its capital to a level where the ratio of its outstanding thrift certificates compared to capital does not exceed the permitted ratio of 15 to 1. Based on the applicable section of the California Financial Code, failure to increase its capital within 120 days would require the DOC to take possession of the property and business of Pacific Thrift. See Subsequent Events, Note 20. SETTLEMENT WITH DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT In April 1993, Pacific Thrift was notified by the Mortgagee Review Board of the Department of Housing and Urban Development (HUD) of certain alleged violations of certain requirements in the origination of 59 loans selected during its examination of Title I loan origination activities. Pacific Thrift was advised that HUD intended to seek civil money penalties and was considering an administrative action. Pacific Thrift filed a response to the allegations affirming its compliance with HUD requirements. On September 15, 1993, HUD and Pacific Thrift entered into a settlement agreement in which Pacific Thrift agreed not to seek claims for insurance on 24 loans that violated the prohibition against subordinating Title I loans to non-Title I loans, as well as on three loans in which the proceeds were used for ineligible purposes. HUD did not impose any penalties or take any other action. 20. EVENTS SUBSEQUENT TO DECEMBER 31, 1994 During February 1995, Pacific Thrift submitted its original capital restoration plan to the FDIC, but the FDIC denied approval of the plan and required certain modifications. During March 1995, Pacific Thrift submitted a revised capital restoration plan, including a guarantee by the Partnership and, in May 1995, the revised capital restoration plan was incorporated by reference in a new C&D (see below) In May 1995, Pacific Thrift was informed by the FDIC that, based on unaudited financial information in the Consolidated Report of Condition and Income (Call Report) filed for the first quarter of 1995, Pacific Thrift was "adequately capitalized" as of March 31, 1995. Based on such Call Report, Pacific Thrift's unaudited capital ratios as of March 31, 1995 were as follows: Capital Ratio as of March 31, 1995 (Unaudited) - -------------------------------------------------------------------------------- Required Actual -------- ------ Tier 1 capital (to average assets) 4.0% 5.5% Tier 1 capital (to risk-weighted assets) 4.0 7.2 Total capital (to risk-weighted assets) 8.0 8.5
In addition, Pacific Thrift was informed by the DOC that Pacific Thrift had cured the deficiency in its net worth as of April 30, 1995 and has complied with the Order. Also in May 1995, the FDIC terminated the prior C&Ds, and the FDIC and DOC issued a new comprehensive Order to Cease and Desist (the new C&D) with the consent of Pacific Thrift. The new C&D: requires that Pacific Thrift have and retain qualified management; requires that Pacific Thrift have Tier 1 capital which equals or exceeds 8% of total assets on or before September 30, 1995; requires that Pacific Thrift maintain at least the minimum risk-based capital levels throughout the life of the new C&D; requires Pacific Thrift to eliminate from its books, through charge-off or collection, all assets classified "loss" as of September 1994 within 10 days from the effective date of the new C&D; requires Pacific Thrift to reduce assets classified "substandard" as of September 1994 to $6.5 million within 180 days and to $5 million within 365 days; prohibits Pacific Thrift from extending any additional credit to any borrower who has a loan with Pacific Thrift which has been charged off or classified "loss"; requires Board of Directors or loan committee approval prior to the extension of additional credit to a borrower who has a loan classified "substandard"; requires Pacific Thrift to establish within 10 days, and then to maintain on a quarterly basis, an adequate allowance for loan losses; requires that Pacific Thrift implement within 60 days the provisions of the capital restoration and business/profitability plans submitted to the FDIC in order to control overhead and other expenses and restore profitability; requires that Pacific Thrift correct the violation of the thrift-to-capital ratio required under California law within 60 days; requires that Pacific Thrift file with the FDIC amended Call Reports as of December 31, 1993 and as of the end of the first three quarters of 1994 which accurately reflect Pacific Thrift's financial condition as of those dates; requires that throughout the life of the new C&D, Pacific Thrift shall file Call Reports which accurately reflect Pacific Thrift's financial condition as of the end of each period; prohibits Pacific Thrift from paying cash dividends in any amount without the prior written approval of the FDIC; prohibits Pacific Thrift from opening any additional offices without the prior written approval of the FDIC; and requires the Company to submit written progress reports on a quarterly basis until the Company accomplishes the corrections and is released by the Regional Director of FDIC and the Commissioner of the DOC. Noncompliance with the terms of the new C&D could result in various regulatory actions, including the assessment of civil money penalties, termination of deposit insurance, and placing Pacific Thrift in conservatorship of receivership. Although there is no assurance as to the ultimate outcome, these consolidated financial statements do not include any provisions or adjustments that might result from the outcome of these uncertainties. As of December 31, 1995, Pacific Thrift had increased its total risk-based capital ratio to 12.4%, its Tier 1 risk-based capital ratio to 11.2% and its leverage capital ratio to 9.1%, which meet the FDIC definition of "well capitalized." However, due to the requirement of maintaining a specific capital level, the Company would be classified as ""adequately capitalized'' under the regulation. On March 27, 1996, Pacific Thrift was notified by the FDIC that, based on the FDIC examination of the September 30, 1995 financial information, full compliance with the new C&D is reported. On April 1, 1996, Pacific Thrift entered into a Memorandum of Understanding (MOU) with the FDIC and DOC. The MOU provides a framework for Pacific Thrift's recovery and its provisions are similar to crucial sections of the existing C&D. However, since the MOU contain provisions requiring the maintenance of a specified capital level, Pacific Thrift would be classified as "adequately capitalized" under the regulations, and continue to be considered a troubled institution for all regulatory purposes. Quantitative measures established by regulation to ensure capital adequacy require Pacific Thrift to maintain minimum amounts and ratios of Tier 1 capital (as defined) to average assets (as defined) of 4%, and Tier 1 capital (as defined) to risk-weighted assets (as defined) of 4% and total capital (as defined) to risk weighted assets (as defined) of 8%. To be considered well capitalized as defined under the Prompt Corrective Action (PCA) provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991, Pacific Thrift must maintain minimum ratios for Tier 1 leverage of 5%, Tier 1 risk-based of 6%, and total risk-based of 10%. At December 31, 1996, Pacific Thrift had unaudited Tier 1 capital to average assets of 8.7%, Tier 1 capital to risk-weighted assets of 10.6% and total capital to risk-weighted assets of 11.9%, which meet the FDIC definition of "well capitalized." However, due to the requirement of maintaining a specific capital level in the March 1996 MOU, Pacific Thrift would be classified as "adequately capitalized" under the regulation. 21. SUBSEQUENT NAME CHANGE In February 1997 PacificAmerica Lending, Inc. changed its name to PacificAmerica Money Centers, Inc., doing business in California as PacificAmerica Money Center, of California. F-64 123 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES SCHEDULE I CONSOLIDATING SCHEDULE - FINANCIAL POSITION DECEMBER 31, 1996
Pacific- Pacific Lenders Consolidated America Thrift Consolidated Posting and Reconveyance Money and Loan Reconveyance Publishing Corporation, Center, Inc. Company Company Company WA =========================================================================================================== ASSETS Cash and cash equivalents $ 650,000 $ 7,947,000 $ $ $ Accounts receivable 1,786,000 482,000 Receivable for mortgage loan shipped 24,310,000 - Accrued interest receivable - 933,000 Loans receivable 555,000 31,750,000 Loans held for sale - 15,687,000 Receivable from related party 1,296,000 25,008,000 Premium receivable for loan sales - 1,195,000 Excess yield receivable 3,982,000 7,716,000 Other real estate - 1,839,000 Property and equipment 39,000 2,321,000 Deferred income taxes 1,616,000 2,493,000 Other assets 581,000 922,000 Refundable income tax - 730,000 Investment in subsidiaries 16,564,000 - - ----------------------------------------------------------------------------------------------------------- $51,379,000 $99,023,000 $ $ $ ===========================================================================================================
Pacific- America Eliminating Entries Lending Dr Cr Consolidated ============================================================================================ ASSETS Cash and cash equivalents $ 43,000 $ $ $ 8,640,000 Accounts receivable 81,000 2,349,000 Receivable for mortgage loan shipped - 24,310,000 Accrued interest receivable 211,000 1,144,000 Loans receivable 1,210,000 33,515,000 Loans held for sale 2,461,000 18,148,000 Receivable from related party - 26,304,000 - Premium receivable for loan sales - 1,195,000 Excess yield receivable - 11,698,000 Other real estate 2,446,000 4,285,000 Property and equipment - 2,360,000 Deferred income taxes 886,000 4,995,000 Other assets 62,000 1,565,000 Refundable income tax - 730,000 Investment in subsidiaries - 16,564,000 - - --------------------------------------------------------------------------------------------- $7,400,000 $ - $42,868,000 $114,934,000 ==============================================================================================
See independent auditors' report and notes to consolidated financial statements. F-65 124 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES SCHEDULE I CONSOLIDATING SCHEDULE - FINANCIAL POSITION DECEMBER 31, 1996
Pacific- Lenders Consolidated America Pacific Thrift Consolidated Posting and Reconveyance Money and Loan Reconveyance Publishing Corporation, Center, Inc. Company Company Company WA ========================================================================================================================== LIABILITIES AND PARTNERS' CAPITAL Thrift certificates payable Full-paid certificates $ -- $56,343,000 $ $ $ Installment certificates 24,659,000 - -------------------------------------------------------------------------------------------------------------------------- 81,002,000 Accounts payable and accrued expenses 1,276,000 934,000 Accrued interest payable -- 185,000 Payable to related party 24,990,000 121,000 Mortgage notes payable -- 189,000 Notes payable 2,545,000 -- Deferred income taxes 602,000 3,844,000 - -------------------------------------------------------------------------------------------------------------------------- 29,413,000 86,275,000 - -------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies - -------------------------------------------------------------------------------------------------------------------------- Stockholder's capital Common stock 17,804,000 3,000,000 Additional paid-in capital -- 8,304,000 Accumulated earnings (deficit) 4,162,000 1,444,000 - -------------------------------------------------------------------------------------------------------------------------- 21,966,000 12,748,000 - -------------------------------------------------------------------------------------------------------------------------- $51,379,000 $99,023,000 $ $ $ ==========================================================================================================================
Pacific- America Eliminating Entries Lending Dr Cr Consolidated ================================================================================================= LIABILITIES AND PARTNERS' CAPITAL Thrift certificates payable Full-paid certificates $ - $ $ $ 56,343,000 Installment certificates - 24,659,000 - ------------------------------------------------------------------------------------------------- - 81,002,000 Accounts payable and accrued expenses 31,000 6,000 2,235,000 Accrued interest payable - 185,000 Payable to related party 1,187,000 26,298,000 - Mortgage notes payable 1,368,000 1,557,000 Notes payable 745,000 3,290,000 Deferred income taxes 253,000 4,699,000 - ------------------------------------------------------------------------------------------------- 3,584,000 26,304,000 92,968,000 - ------------------------------------------------------------------------------------------------- Commitments and contingencies - ------------------------------------------------------------------------------------------------- Stockholder's capital Common stock 2,920,000 5,920,000 17,804,000 Additional paid-in capital - 8,304,000 - Accumulated earnings (deficit) 896,000 2,340,000 4,162,000 - ------------------------------------------------------------------------------------------------- 3,816,000 16,564,000 21,966,000 - ------------------------------------------------------------------------------------------------- $ 7,400,000 $42,868,000 $ $114,934,000 =================================================================================================
See independent auditors' report and notes to consolidated financial statements. F-66 125 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES SCHEDULE II CONSOLIDATING SCHEDULE - OPERATIONS YEAR ENDED DECEMBER 31, 1996
Pacific- Pacific Lenders America Thrift Consolidated Posting and Money and Loan Reconveyance Publishing Center, Inc. Company Company Company ============================================================================================================ INTEREST INCOME Loans receivable $ 614,000 $10,256,000 $ -- $ -- Deposits with financial institutions 4,000 324,000 -- -- - ------------------------------------------------------------------------------------------------------------ Total interest income 618,000 10,580,000 -- -- - ------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Thrift certificates greater than $100,000 -- 23,000 -- -- Other thrift certificates -- 4,391,000 -- -- Notes payable 418,000 -- -- -- - ------------------------------------------------------------------------------------------------------------ Total interest expense 418,000 4,414,000 -- -- - ------------------------------------------------------------------------------------------------------------ Net interest income 200,000 6,166,000 -- -- PROVISION FOR LOAN LOSSES 150,000 1,277,000 -- -- - ------------------------------------------------------------------------------------------------------------ Net interest income (loss) after provision for loan losses 50,000 4,889,000 -- -- - ------------------------------------------------------------------------------------------------------------ NONINTEREST INCOME Trust and reconveyance fees -- -- 2,844,000 -- Other income 63,000 614,000 -- 410,000 Gain on sale of loans: Excess yield 925,000 8,692,000 -- -- Premiums -- 19,600,000 -- -- Loan servicing fees -- 199,000 -- -- Equity in income of subsidiaries 8,226,000 -- -- -- - ------------------------------------------------------------------------------------------------------------ Total noninterest income 9,214,000 29,105,000 2,844,000 410,000 ============================================================================================================
Consolidated Reconveyance Pacific- Corporation, America Eliminating Entries WA Lending Dr Cr Consolidated ============================================================================================================================ INTEREST INCOME Loans receivable $ -- $ 304,000 $ -- $ -- $11,174,000 Deposits with financial institutions -- -- -- -- 328,000 - -------------------------------------------------------------------------------------------------------------------------- Total interest income -- 304,000 -- -- 11,502,000 - -------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Thrift certificates greater than $100,000 -- -- -- -- 23,000 Other thrift certificates -- -- -- -- 4,391,000 Notes payable -- 134,433 -- -- 552,000 - -------------------------------------------------------------------------------------------------------------------------- Total interest expense -- 134,000 -- -- 4,966,000 - -------------------------------------------------------------------------------------------------------------------------- Net interest income -- 170,000 -- -- 6,536,000 PROVISION FOR LOAN LOSSES -- (276,000) -- -- 1,151,000 - -------------------------------------------------------------------------------------------------------------------------- Net interest income (loss) after provision for loan losses -- 446,000 -- -- 5,385,000 - -------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust and reconveyance fees 11,000 -- 2,855,000 -- -- Other income -- 100,000 410,000 -- 777,000 Gain on sale of loans: Excess yield -- -- -- -- 9,617,000 Premiums -- -- -- -- 19,600,000 Loan servicing fees -- -- 199,000 -- -- Equity in income of subsidiaries -- -- 8,226,000 -- -- - -------------------------------------------------------------------------------------------------------------------------- Total noninterest income 11,000 100,000 11,690,000 -- 29,994,000 ==========================================================================================================================
F-67 126 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES SCHEDULE II CONSOLIDATING SCHEDULE - OPERATIONS YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
Pacific- Pacific Lenders America Thrift Consolidated Posting and Money and Loan Reconveyance Publishing Center, Inc. Company Company Company ============================================================================================================ NONINTEREST EXPENSE Salaries and employee benefits 672,000 13,929,000 1,715,000 151,000 General and administrative 3,004,000 8,867,000 947,000 142,000 Related party fees 1,071,000 -- -- -- Operations of other real estate 102,000 465,000 -- -- Depreciation and amortization 339,000 375,000 29,000 -- Loss on disposal of business segment 928,000 -- -- -- - ----------------------------------------------------------------------------------------------------------- Total noninterest expense 6,116,000 23,636,000 2,691,000 293,000 - ----------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES 3,148,000 10,358,000 153,000 117,000 INCOME TAX EXPENSE (BENEFIT) (1,014,000) 3,304,000 2,000 2,000 - ----------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 4,162,000 7,054,000 151,000 115,000 LOSS FROM DISCONTINUED OPERATIONS -- -- -- -- - ----------------------------------------------------------------------------------------------------------- NET INCOME $4,162,000 $ 7,054,000 $ 151,000 $ 115,000 ===========================================================================================================
Consolidated Reconveyance Pacific- Corporation, America Eliminating Entries WA Lending Dr Cr Consolidated ===================================================================================================================== NONINTEREST EXPENSE Salaries and employee benefits -- 21,000 -- 1,866,000 14,622,000 General and administrative 1,000 148,000 -- 1,090,000 12,019,000 Related party fees -- -- -- 199,000 872,000 Operations of other real estate -- 114,000 -- -- 681,000 Depreciation and amortization -- -- -- 29,000 714,000 Loss on disposal of business segment -- -- -- 928,000 -- - --------------------------------------------------------------------------------------------------------------------- Total noninterest expense 1,000 283,000 -- 4,112,000 28,908,000 - --------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 10,000 263,000 11,690,000 4,112,000 6,471,000 INCOME TAX EXPENSE (BENEFIT) -- (633,000) -- 3,000 1,658,000 - --------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 10,000 896,000 11,690,000 4,115,000 4,813,000 LOSS FROM DISCONTINUED OPERATIONS -- -- 3,917,000 3,266,000 (651,000) - --------------------------------------------------------------------------------------------------------------------- NET INCOME $10,000 $896,000 $15,607,000 $7,381,000 $ 4,162,000 =====================================================================================================================
See independent auditors' report and notes to consolidated financial statements. F-68 127 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES SCHEDULE III CONSOLIDATING SCHEDULE - FINANCIAL POSITION DECEMBER 31, 1995
Lenders Pacific- Pacific Posting America Presidential Thrift Consolidated and Money Mortgage and Loan Reconveyance Publishing Center, Eliminating Entries Company Company Company Company Inc. Dr Cr Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 609,000 $ 9,550,000 $ 283,000 $ 47,000 $ -- $ -- $ -- $10,489,000 Accounts receivable 1,000 126,000 2,925,000 285,000 -- -- -- 3,337,000 Accrued interest receivable 357,000 546,000 -- -- -- -- -- 903,000 Loans receivable 3,332,000 40,576,000 -- -- -- -- -- 43,908,000 Loans held for sale 3,000,000 9,577,000 -- -- -- -- -- 12,577,000 Receivable from related party 417,000 116,000 -- -- -- -- 186,000 347,000 Excess yield receivable -- 2,725,000 -- -- -- -- -- 2,725,000 Other real estate 1,408,000 1,748,000 -- -- -- -- -- 3,156,000 Property and equipment 48,000 1,269,000 115,000 20,000 -- -- 54,000 1,398,000 Goodwill 1,808,000 -- -- -- -- -- -- 1,808,000 Deferred income taxes -- 1,612,000 -- -- -- -- -- 1,612,000 Other assets 90,000 440,000 44,000 6,000 104,000 -- -- 684,000 Investment in subsidiaries 7,970,000 -- -- -- -- 4,485,000 12,455,000 -- - --------------------------------------------------------------------------------------------------------------------------------- $19,040,000 $68,285,000 $3,367,000 $358,000 $ 104,000 $ 4,485,000 $12,695,000 $82,944,000 - ---------------------------------------------------------------------------------------------------------------------------------
See independent auditors' report and notes to consolidated financial statements. F-69 128 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES SCHEDULE III CONSOLIDATING SCHEDULE - FINANCIAL POSITION DECEMBER 31, 1995
Pacific Lenders Pacific- Presidential Thrift Consolidated Posting and America Mortgage and Loan Reconveyance Publishing Money Eliminating Entries Company Company Company Company Center, Inc. Dr Cr Consolidated ==================================================================================================================================== LIABILITIES AND PARTNERS' CAPITAL Thrift certificates payable Full-paid certificates $ -- $35,881,000 $ -- $ -- $ -- $ -- $ -- $35,881,000 Installment certificates -- 24,275,000 -- -- -- -- -- 24,275,000 - ------------------------------------------------------------------------------------------------------------------------------------ -- 60,156,000 -- -- -- -- -- 60,156,000 Accounts payable and accrued expenses 694,000 769,000 2,444,000 132,000 -- 21,000 -- 4,018,000 Accrued interest payable 170,000 103,000 -- -- -- -- -- 273,000 Payable to related party 345,000 -- -- -- 101,000 165,000 -- 281,000 Mortgage notes payable 560,000 51,000 -- -- -- -- -- 611,000 Notes payable 6,771,000 -- -- -- -- -- -- 6,771,000 Note payable to related party 600,000 -- -- -- -- -- -- 600,000 Deferred income taxes -- 387,000 -- -- -- -- -- 387,000 Partnership withdrawals payable 1,120,000 -- -- -- -- -- -- 1,120,000 - ------------------------------------------------------------------------------------------------------------------------------------ 10,260,000 61,466,000 2,444,000 132,000 101,000 186,000 -- 74,217,000 - ------------------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies - ------------------------------------------------------------------------------------------------------------------------------------ Partners' capital Common stock -- 3,000,000 -- -- -- 3,000,000 -- -- Additional paid-in capital -- 8,304,000 -- -- 3,000 8,307,000 -- -- Accumulated deficit -- (4,485,000) -- -- -- -- 4,485,000 -- Partners' capital 8,780,000 -- 923,000 226,000 -- 1,202,000 -- 8,727,000 - ------------------------------------------------------------------------------------------------------------------------------------ 8,780,000 6,819,000 923,000 226,000 3,000 12,509,000 4,485,000 8,727,000 - ------------------------------------------------------------------------------------------------------------------------------------ $19,040,000 $68,285,000 $3,367,000 $358,000 $ 104,000 $12,695,000 $4,485,000 $82,944,000 ====================================================================================================================================
See independent auditors' report and notes to consolidated financial statements. F-70 129 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES SCHEDULE IV CONSOLIDATING SCHEDULE - OPERATIONS YEAR ENDED DECEMBER 31, 1995
Pacific Lenders Presidential Thrift Consolidated Posting and Mortgage and Loan Reconveyance Publishing Company Company Company Company - --------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans receivable $ 1,872,000 $7,013,000 $ -- $ -- Deposits with financial institutions 10,000 682,000 -- -- - --------------------------------------------------------------------------------------------------------- Total interest income 1,882,000 7,695,000 -- -- - --------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Thrift certificates greater than $100,000 -- 7,000 -- -- Other thrift certificates -- 3,813,000 -- -- Notes payable 1,379,000 -- -- -- - --------------------------------------------------------------------------------------------------------- Total interest expense 1,379,000 3,820,000 -- -- - --------------------------------------------------------------------------------------------------------- Net interest income 503,000 3,875,000 -- -- PROVISION FOR LOAN LOSSES 1,894,000 1,395,000 -- -- - --------------------------------------------------------------------------------------------------------- Net interest income (expense) after provision for loan losses (1,391,000) 2,480,000 -- -- - --------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust and reconveyance fees -- -- 3,248,000 -- Other income 139,000 353,000 -- 577,000 Gain on sale of loans -- 8,895,000 -- -- Loan servicing fees -- 351,000 -- -- Equity in income of subsidiaries 4,016,000 -- -- -- - --------------------------------------------------------------------------------------------------------- 4,155,000 9,599,000 3,248,000 577,000 - ---------------------------------------------------------------------------------------------------------
Pacific- America Money Eliminating Entries Center, Inc. Dr Cr Consolidated - ------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans receivable $ -- $ -- $ -- $8,885,000 Deposits with financial institutions -- -- -- 692,000 - ------------------------------------------------------------------------------------------------------ Total interest income -- -- -- 9,577,000 - ------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Thrift certificates greater than $100,000 -- -- -- 7,000 Other thrift certificates -- -- -- 3,813,000 Notes payable -- -- -- 1,379,000 - ------------------------------------------------------------------------------------------------------- Total interest expense -- -- -- 5,199,000 - ------------------------------------------------------------------------------------------------------- Net interest income -- -- -- 4,378,000 PROVISION FOR LOAN LOSSES -- -- -- 3,289,000 - ------------------------------------------------------------------------------------------------------- Net interest income (expense) after provision for loan losses -- -- -- 1,089,000 - ------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust and reconveyance fees -- 3,248,000 -- -- Other income -- 577,000 53,000 545,000 Gain on sale of loans -- -- -- 8,895,000 Loan servicing fees -- 351,000 -- -- Equity in income of subsidiaries -- 4,016,000 -- -- - ------------------------------------------------------------------------------------------------------- -- 8,192,000 53,000 9,440,000 - -------------------------------------------------------------------------------------------------------
F-71 130 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES SCHEDULE IV CONSOLIDATING SCHEDULE - OPERATIONS YEAR ENDED DECEMBER 31, 1995 (CONTINUED)
Pacific Lenders Pacific- Presidential Thrift Consolidated Posting and America Mortgage and Loan Reconveyance Publishing Money Company Company Company Company Center, Inc. - -------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits 392,000 5,608,000 1,712,000 146,000 - General and administrative 1,192,000 4,002,000 927,000 152,000 - Related party fees 1,363,000 - - - - Operations of other real estate 1,120,000 92,000 - - - Depreciation and amortization 529,000 446,000 26,000 - - - -------------------------------------------------------------------------------------------------------------------- 4,596,000 10,148,000 2,665,000 298,000 - - -------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) (1,832,000) 1,931,000 583,000 279,000 - INCOME TAXES (BENEFIT) 1,000 (1,224,000) 1,000 1,000 - - -------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (1,833,000) 3,155,000 582,000 278,000 - INCOME FROM DISCONTINUED OPERATIONS - - - - - - -------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(1,833,000) $3,155,000 $ 582,000 $ 278,000 $ - - --------------------------------------------------------------------------------------------------------------------
Eliminating Entries Dr Cr Consolidated - -------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits - 1,858,000 6,000,000 General and administrative - 1,079,000 5,194,000 Related party fees - 351,000 1,012,000 Operations of other real estate - - 1,212,000 Depreciation and amortization - 108,000 893,000 - -------------------------------------------------------------------------------------------- - 3,396,000 14,311,000 - -------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 8,192,000 3,449,000 (3,782,000) INCOME TAXES (BENEFIT) - 2,000 (1,223,000) - -------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 8,192,000 3,451,000 (2,559,000) INCOME FROM DISCONTINUED OPERATIONS 2,965,000 3,826,000 861,000 - -------------------------------------------------------------------------------------------- NET INCOME (LOSS) $11,157,000 $7,277,000 $(1,698,000) - --------------------------------------------------------------------------------------------
See independent auditors' report and notes to consolidated financial statements. F-72 131 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES SCHEDULE V CONSOLIDATING SCHEDULE - OPERATIONS YEAR ENDED DECEMBER 31, 1994
============================================================================================================= Pacific Lenders Presidential Thrift Consolidated Posting and Mortgage and Loan Reconveyance Publishing Company Company Company Company ============================================================================================================= INTEREST INCOME Loans receivable $2,969,000 $8,034,000 $ -- $ -- Deposits with financial institutions 1,000 400,000 -- -- - ------------------------------------------------------------------------------------------------------------- Total interest income 2,970,000 8,434,000 -- -- - ------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Thrift certificates greater than $100,000 -- 28,000 -- -- Other thrift certificates -- 2,917,000 -- -- Notes payable 1,974,000 8,000 -- -- - ------------------------------------------------------------------------------------------------------------- Total interest expense 1,974,000 2,953,000 -- -- - ------------------------------------------------------------------------------------------------------------- Net interest income 996,000 5,481,000 -- -- PROVISION FOR LOAN LOSSES 4,682,000 1,414,000 -- -- - ------------------------------------------------------------------------------------------------------------- Net interest income (expense) after provision for loan losses (3,686,000) 4,067,000 -- -- - ------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust and reconveyance fees -- -- 3,344,000 -- Other income 319,000 806,000 -- 587,000 Gain on sale of loans -- 946,000 -- -- Loan servicing fees -- 545,000 -- -- Equity in income of subsidiaries (2,001,000) -- -- -- - ------------------------------------------------------------------------------------------------------------- (1,682,000) 2,297,000 3,344,000 587,000 - ------------------------------------------------------------------------------------------------------------- =================================================================================================================================== Eliminating Entries ---------------------- Dr Cr Consolidated =================================================================================================================================== INTEREST INCOME Loans receivable $ -- $ -- $11,003,000 Deposits with financial institutions -- -- 401,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest income -- -- 11,404,000 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Thrift certificates greater than $100,000 -- -- 28,000 Other thrift certificates -- -- 2,917,000 Notes payable -- -- 1,982,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense -- -- 4,927,000 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income -- -- 6,477,000 PROVISION FOR LOAN LOSSES -- -- 6,096,000 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income (expense) after provision for loan losses -- -- 381,000 - ----------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust and reconveyance fees 3,344,000 -- -- Other income 587,000 -- 1,125,000 Gain on sale of loans -- -- 946,000 Loan servicing fees 545,000 -- -- Equity in income of subsidiaries 907,000 2,908,000 -- - ----------------------------------------------------------------------------------------------------------------------------------- 5,383,000 2,908,000 2,071,000 - -----------------------------------------------------------------------------------------------------------------------------------
F-73 132 PACIFICAMERICA MONEY CENTER, INC. AND SUBSIDIARIES SCHEDULE V CONSOLIDATING SCHEDULE - OPERATIONS YEAR ENDED DECEMBER 31, 1994 - ------------------------------------------------------------------------------------------------------------
Pacific Lenders Presidential Thrift Consolidated Passing and Mortgage and Loan Reconveyance Publishing Company Company Company Company - ------------------------------------------------------------------------------------------------------------ Noninterest expense Salaries and employee benefits $ 295,000 $ 4,460,000 $1,569,000 $169,000 General and administrative 1,752,000 4,081,000 1,168,000 89,000 Related party fees 1,350,000 -- -- -- Operations of other real estate 439,000 293,000 -- -- Depreciation amortization 310,000 437,000 29,000 -- - ------------------------------------------------------------------------------------------------------------ 4,146,000 9,271,000 2,766,000 258,000 - ------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes (benefit) (9,514,000) (2,907,000) 578,000 329,000 Income taxes (benefit) -- 1,000 -- -- - ------------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations (9,514,000) (2,908,000) 578,000 329,000 Income from discontinued operations -- -- -- -- - ------------------------------------------------------------------------------------------------------------ Net income (loss) $(9,514,000) $(2,908,000) $ 578,000 $329,000 ============================================================================================================ Eliminating Entries --------------------------- Dr Cr Consolidated - -------------------------------------------------------------------------------------------- Noninterest expense Salaries and employee benefits $ -- $ 1,738,000 $ 4,755,000 General and administrative -- 1,257,000 5,833,000 Related party fees -- 545,000 805,000 Operations of other real estate -- -- 732,000 Depreciation amortization -- 29,000 747,000 - -------------------------------------------------------------------------------------------- -- 3,569,000 12,872,000 - -------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) 5,383,000 6,477,000 (10,420,000) Income taxes (benefit) -- -- 1,000 - -------------------------------------------------------------------------------------------- Income (loss) from continuing operations 5,383,000 6,477,000 (10,421,000) Income from discontinued operations 3,024,000 3,931,000 907,000 - -------------------------------------------------------------------------------------------- Net income (loss) $8,407,000 $10,408,000 $ (9,514,000) ============================================================================================
See independent auditors' report and notes to consolidated financial statements. F-74 133 INDEX OF EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on December 22, 1995, as amended and declared effective on May 14, 1996 (the "Registration Statement"). 3.2 Bylaws of the Registrant, incorporated by reference to the Exhibit 3.2 of the Registration Statement. 4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 of the Registration Statement. 4.2 General Partner Warrant Agreement and Warrant, incorporated by reference to Exhibit 4.2 of the Registration Statement. 4.3 Subscriber Warrant and Warrant Agreement, incorporated by reference to Exhibit 4.3 of the Registration Statement. 10.1 Employment Agreement by and between the Registrant and Joel R. Schultz, incorporated by reference to Exhibit 10.1 of the Registration Statement. 10.2 Employment Agreement by and between the Registrant and Richard D. Young, incorporated by reference to Exhibit 10.2 of the Registration Statement. 10.3 Employment Agreement by and between the Registrant and Kenneth A. Carmona, incorporated by reference to Exhibit 10.3 of the Registration Statement. 10.4 Employment Agreement by and between the Registrant and Norman A. Markiewicz, incorporated by reference to Exhibit 10.4 of the Registration Statement. 10.5 Employment Agreement by and between the Registrant and Richard B. Fremed, incorporated by reference to Exhibit 10.5 of the Registration Statement. 10.6 Employment Agreement by and between Pacific Thrift and Loan Company, Inc. and Frank Landini, incorporated by reference to Exhibit 10.6 of the Registration Statement. 10.7 Employment Agreement by and between the Registrant and Charles J. Siegel. S-1 134 10.8 Form of Indemnification Agreement by and between the Registrant and each of its directors and executive officers, incorporated by reference to Exhibit 10.7 of the Registration Statement. 10.9 Stock Option Plan of the Registrant, dated January 1, 1996, incorporated by reference to Exhibit 10.8 of the Registration Statement. 10.10 Stock Purchase Plan of the Registrant, dated January 1, 1996, incorporated by reference to Exhibit 10.9 of the Registration Statement. 10.11 Supplemental Executive Retirement Plan of the Registrant, dated January 1, 1996, incorporated by reference to Exhibit 10.10 of the Registration Statement. 10.12 Master Loan Purchase Agreement dated as of October 31, 1996, by and between the Registrant and Aames Capital Corporation, incorporated by reference to Exhibit 10.1 of the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996. 10.13 First and Second Amendments to Master Loan Purchase Agreement by and between the Registrant and Aames Capital Corporation. 10.14 Amended and Restated Corporate Finance Agreement, dated as of January 27, 1997, by and among the Registrant, Advanta Mortgage Conduit Services, Inc. and Advanta Mortgage Corp. USA. 10.15 Asset and Stock Purchase and Sale and Assumption of Liabilities Agreement, Secured Promissory Note and Security Agreement, all dated as of December 15, 1996, among the Registrant, Consolidated Reconveyance Company, Lenders Posting and Publishing Company, Consolidated Reconveyance Corporation, Consolidated Reconveyance Company, LLC and Lenders Posting and Publishing Company, LLC, incorporated by reference to Exhibit 10.1 of the Registrant's Report on Form 8-K for December 31, 1996. 11.1 Calculation of Earnings Per Share 10.16 Mortgage Loan Purchase and Sale Agreement dated as of December 27, 1996, by and between the Company and Pacific Crest Investment and Loan, incorporated by reference to Exhibit 10.2 of the Registrant's Report on Form 8-K for December 31, 1996. 16.1 Letter of Ernst & Young regarding termination dated September 27, 1995, incorporated by reference to the Registrant's Report on Form 8-K for September 12, 1995. 21.1 Subsidiaries of the Registrant 27. Financial Data Schedule S-2 EX-10.7 2 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.7 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of June 27, 1996, by and between PACIFICAMERICA MONEY CENTER, INC., a Delaware corporation (hereinafter referred to as "EMPLOYER") and CHARLES J. SIEGEL (hereinafter referred to as "SIEGEL") on the following terms and conditions: 1. TERM OF AGREEMENT; DUTIES. 1. Term. EMPLOYER hereby agrees to employ SIEGEL as Chief Financial Officer of EMPLOYER, Pacific Thrift and Loan Company, Inc., a California corporation ("Pacific Thrift") and PacificAmerica Lending, Inc.("PAL"), a Delaware corporation, both of which are operating subsidiaries of the EMPLOYER, for a two-year term, commencing on the date hereof, and SIEGEL hereby agrees to accept such employment for such term, subject to earlier termination under the circumstances provided herein. The term of this Agreement shall be extended automatically to cover successive terms of one year commencing on each anniversary date of the date hereof after the initial two-year term, unless, at least six months prior to the end of the initial term or any renewal term hereof, SIEGEL gives written notice to the Board of Directors of EMPLOYER (the "Board"), or EMPLOYER gives written notice to SIEGEL, of an intent to terminate this Agreement at the end of such term. 2. Duties. SIEGEL, subject to the direction and control of the Board, shall devote all of SIEGEL'S productive time, attention and energies to discharging, and shall perform, such executive duties and managerial responsibilities as Chief Financial Officer of EMPLOYER, Pacific Thrift and PAL as may from time to time be specified by EMPLOYER, and will use SIEGEL'S best efforts to promote the interests of EMPLOYER and its subsidiaries and affiliates. The performance of such duties and responsibilities shall be performed primarily in Los Angeles County and shall be SIEGEL'S exclusive employment for compensation; provided, however, that nothing herein contained shall be deemed to limit SIEGEL'S right to engage in other activities that do not interfere with SIEGEL'S duties hereunder, with the consent of the Board. 2. COMPENSATION. (a) In consideration for the services to be rendered by SIEGEL hereunder during the term of SIEGEL'S employment, including all services to be rendered as an officer and executive of EMPLOYER, its subsidiaries and affiliates, EMPLOYER agrees to compensate SIEGEL as follows: (i) During the term of this Agreement, EMPLOYER shall pay SIEGEL a salary at an annual base rate of one hundred sixty thousand dollars ($160,000) per year, which shall 2 be adjusted annually on December 31 of each year, to reflect, at a minimum, any increase from the previous year in the Consumer Price Index for the Los Angeles, California area (the "Base Salary"), in addition to such merit salary increase as shall be determined by the Board of Directors or the Employee Compensation Committee of the Board of Directors. The applicable Base Salary shall be payable not less frequently than monthly in accordance with the regular salary procedure from time to time adopted by EMPLOYER. There shall be deducted from all compensation paid to SIEGEL such sums, including but not limited to Social Security, income tax withholding, employment insurance, and any and all other such deductions, as EMPLOYER is by law obligated to withhold. (ii) SIEGEL shall be reimbursed for SIEGEL'S reasonable and actual out-of-pocket expenses incurred by SIEGEL in performance of SIEGEL'S duties and responsibilities hereunder, provided that SIEGEL shall first furnish to EMPLOYER proper vouchers and/or receipts. (iii) SIEGEL shall be entitled to participate in, and shall be included in, such insurance, pension, profit sharing, stock option, stock purchase, employee cash bonus pools, and other employee benefit plans of EMPLOYER as are in effect from time to time during the term of this Agreement and provided to other senior executive employees of EMPLOYER, including, but not limited to, EMPLOYER'S Supplemental Executive Retirement Plan (all of which are collectively referred to herein as the "Benefit Plans"). (iv) SIEGEL shall also be entitled to all perquisites provided in accordance with EMPLOYER'S policy for senior management executives from time to time in effect (all of which are collectively referred to herein as the "Perquisites"). Notwithstanding the foregoing, in no event shall each or any of the Perquisites provided pursuant to the terms of this Section 2 (a) (iv) be lesser in value than such perquisites as were provided to SIEGEL by Pacific Thrift, Presidential Mortgage Company, a California limited partnership ("Presidential") and/or Presidential Management Company, a California limited partnership, and in effect immediately prior to the transfer of assets by Presidential to EMPLOYER. Perquisites provided pursuant to this Section 2(a) (iv) shall include, without limitation, use of an automobile or automobile allowance, expense allowances, vacation days, sick days and holidays, and medical, dental and life insurance benefits. 3. DISABILITY. If, on account of any physical or mental disability, SIEGEL shall fail or be unable to perform under this Agreement for any period of one hundred twenty (120) consecutive days or for an aggregate period of one hundred twenty (120) or more days during any consecutive twelve-month period, EMPLOYER may, at its option, at any time thereafter, upon written notice to SIEGEL, terminate the employment relationship provided for in this Agreement. In such event, SIEGEL'S requirement to 2 3 render services hereunder and EMPLOYER'S requirement to compensate SIEGEL hereunder shall terminate and come to an end upon the date provided in such notice. In that event, SIEGEL shall be entitled to receive, as disability compensation: (i) SIEGEL'S Base Salary for one year following termination of this Agreement payable not less frequently than monthly,(ii) the cash value of all vacation, holiday and sick days which have accrued up to the date of disability, and (iii) use of an automobile or automobile allowance, full automobile insurance coverage, and health insurance coverage under any health insurance policies maintained by EMPLOYER for its other senior executives, all of which shall be provided pursuant to the terms of Section 2 (a) (iv) herein and shall continue to be provided without interruption for the greater of one year following the effective date of termination pursuant to this Section 3 or the remainder of the term of this Agreement. EMPLOYER may, at its option, apply for disability income insurance and, if so, any obligation on the part of EMPLOYER to pay SIEGEL any monthly payments on account of any physical or mental disability of SIEGEL as specified above, shall be reduced by the amount of any monthly payments to SIEGEL under any such disability income policy. Any payments to SIEGEL under any state disability insurance shall not reduce the amount payable to SIEGEL under this Agreement. 4. DEATH. In the event of SIEGEL'S death during the term hereof, this Agreement shall terminate immediately. In such event, SIEGEL's personal representative shall be entitled to receive, as a death benefit, in addition to any other payments which SIEGEL's personal representative may be entitled to receive under any Benefit Plans, SIEGEL'S Base Salary for one year following SIEGEL'S death, payable not less frequently than monthly, together with the cash value of all vacation, holiday and sick days which have accrued up to the date of death. EMPLOYER may maintain life insurance on the life of SIEGEL in favor of the EMPLOYER. SIEGEL shall have no interest whatsoever in any such policy or policies, except as otherwise provided in any split dollar life insurance agreements, but SIEGEL shall, at the request of EMPLOYER, submit to such medical examinations, supply such information, consent to such blood tests and execute such documents as may be required by the insurance company or companies to whom EMPLOYER has applied for such insurance. 5. TERMINATION FOR CAUSE. EMPLOYER may discharge SIEGEL at any time for cause. "Cause" for discharge shall mean (i) theft or embezzlement by SIEGEL from EMPLOYER or its affiliates, (ii) fraud or other acts of dishonesty by SIEGEL in the conduct of EMPLOYER'S business or the fulfillment of SIEGEL'S assigned responsibilities hereunder, (iii) SIEGEL'S conviction of, or plea of nolo contendere to, any felony or any crime involving moral turpitude, (iv) SIEGEL'S willfully and knowingly taking any action which is materially injurious to EMPLOYER'S business or reputation. Within 10 business days following 3 4 receipt of written notice of termination for Cause, SIEGEL shall have the right to demand and, if demanded, to receive within 30 days, an opportunity to respond and defend himself before the Board and to have the Board by resolution confirm by a three-fourths affirmative vote that EMPLOYER has grounds to terminate SIEGEL for Cause. If the Board does not determine that Cause exists, SIEGEL shall have the option to treat his employment as not having terminated or as having been terminated by EMPLOYER without cause as defined in Section 6 herein. Without limiting the foregoing, nothing in this Section 5 shall be construed to require that SIEGEL demand a hearing before the Board as a condition to pursuing any claim or action with respect to the matters contained in this Agreement, and nothing in this Section 5 shall limit SIEGEL'S rights under applicable law. The occurrence of any event constituting cause for discharge shall permit, but not require, EMPLOYER to terminate SIEGEL for Cause; provided, however, that EMPLOYER'S decision not to terminate the SIEGEL upon the occurrence of an event constituting cause for discharge shall not operate as a waiver of its rights provided in this Section 5 or otherwise. If EMPLOYER terminates SIEGEL for Cause, EMPLOYER shall be obligated to provide to SIEGEL only the Base Salary provided for in Section 2 (a) (i) herein through the date of termination of SIEGEL at the rate in effect on the date of such termination, together with the cash value of all vacation, holiday and sick days which have accrued up to the date of termination. The decision to terminate SIEGEL shall be confidential, except to the extent disclosure is required by law. 6. TERMINATION WITHOUT CAUSE. Should EMPLOYER terminate this Agreement for reasons other than those specified in Sections 3, 4, 5, or 7 herein, SIEGEL shall be entitled to use of an automobile or automobile allowance, full automobile insurance coverage, and health insurance coverage under any health insurance policies maintained by EMPLOYER for its other senior executives, all of which shall be provided pursuant to the terms of Section 2 (a) (iv) herein and shall continue to be provided without interruption for six months following the effective date of termination pursuant to this Section 6. Upon termination pursuant to this Section 6, EMPLOYER shall additionally pay to SIEGEL a lump sum payment, to be paid on the effective date of termination pursuant to this Section 6, which shall consist of: (i) one-half of the full annual Base Salary, and (ii) the cash value of all vacation, holiday and sick days which have accrued up to the date of termination and which would have accrued for six months following termination pursuant to this Section 6. (The sum of all amounts and benefits to be provided by EMPLOYER to SIEGEL pursuant to this Section 6 is collectively referred to herein as the "Termination Payment".) 7. CORPORATE CHANGES. 4 5 (a) Definition. SIEGEL may terminate his employment hereunder upon thirty (30) days written notice at any time within one year following the occurrence of a Corporate Change. For purposes of this Section 7, a "Corporate Change" shall be deemed to have occurred upon the occurrence of any one (or more) of the following events: (i) a transaction in which EMPLOYER ceases to be an independent publicly owned corporation that is required to file quarterly and annual reports under the Securities Exchange Act of 1934, (ii) a sale or other disposition of all or substantially all of the assets, or a majority of the outstanding capital stock, of EMPLOYER (including but not limited to the assets or stock of EMPLOYER'S subsidiaries that results in all or substantially all of the assets or stock of EMPLOYER on a consolidated basis being sold), (iii) as a result of, or in connection with, any cash tender offer, exchange offer, merger or other business combination, sale of assets, or contested election for the Board, or combination of the foregoing, persons who were directors of EMPLOYER just prior to such event(s) shall cease to constitute a majority of the Board, (iv) any person, including a group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes the beneficial owner of shares of EMPLOYER with respect to which twenty percent (20%) or more of the total number of votes for the election of the Board may be cast, (v) EMPLOYER'S stockholders cause a change in the majority of the members of the Board within a twelve (12) month period; provided, however, that the election of one or more new directors shall not be deemed to be a change in the membership of the Board if the nomination of the newly elected directors was approved by the vote of three-fourths of the directors then still in office who were directors at the beginning of such twelve (12) month period, or (vi) a tender offer or exchange offer is made for shares of the EMPLOYER'S common stock (other than one made by the EMPLOYER) and shares of common stock are acquired thereunder. (b) Payments. Upon termination of employment pursuant to Section 7(a) hereof, SIEGEL shall be entitled to use of an automobile or automobile allowance, full automobile insurance coverage, and health insurance coverage under any health insurance policies maintained by EMPLOYER for its other senior executive officers, all of which shall be provided pursuant to the terms of Section 2 (a) (iv) herein and shall continue to be provided without interruption for six months following the effective date of termination pursuant to this Section 7. EMPLOYER shall additionally pay to SIEGEL a lump sum payment, to be paid within five (5) days after the date of SIEGEL'S notice pursuant to Section 7 (a) herein, which shall consist of: (i) two times the full annual Base Salary plus three times the amount of the last annual bonus paid to SIEGEL for the most recent fiscal year, and (ii) the cash value of all vacation, holiday and sick days which have accrued up to the date of termination and which would have accrued for six months following termination pursuant to this Section 7. (The sum of all amounts and benefits to be provided by EMPLOYER to SIEGEL pursuant to this Section 7 (b) is collectively referred to herein as the 5 6 "Corporate Changes Termination Payment"). Notwithstanding the foregoing, if SIEGEL gives notice of termination pursuant to this Section 7 prior to the closing of a transaction referred to in Section 7(a)(i) or (ii) hereof, the Corporate Changes Termination Payment must be made a condition to and must be paid on the date of the closing of such a transaction. (c) Tax Limitations on Corporate Changes Payments. If the aggregate of all payments, including but not limited to, the Corporate Changes Termination Payment that is to be paid to SIEGEL contingent on those Corporate Changes specified in Section 7 (a) herein (the "Aggregate Amount"), would constitute a "parachute payment" (as defined in Section 280 G of the Internal Revenue Code of 1986, as amended or supplemented (the "Code"), the Corporate Changes Termination Payment otherwise payable to the SIEGEL pursuant to Section 7 (b) herein shall be equal to the higher of: (i) the amount (referred to herein as the "Reduced Amount") that would result in no portion of the Aggregate Amount being subject to the excise tax imposed by Section 4999 of the Code, or (ii) the full Aggregate Amount if the net after tax payments to SIEGEL would exceed the Reduced Amount. The determination of the Corporate Changes Termination Payment, the Reduced Amount and the net after tax amount payable to SIEGEL on the full Aggregate Amount shall be made by the SIEGEL and the EMPLOYER in good faith, and in the event they disagree, such determination shall be made by means of arbitration to be conducted at the EMPLOYER'S expense. Any such arbitration shall be conducted in Los Angeles, California, by one arbitrator, who shall be a member of a nationally recognized accounting firm that is not then engaged by the EMPLOYER or any of its major stockholders, and who shall be jointly designated by the parties. If the parties cannot agree on the selection of an arbitrator, EMPLOYER'S then current independent auditors shall select such arbitrator. The findings of the arbitrator shall be conclusive and binding on the parties. For purposes of this Section 7(c), the net after tax amount payable to SIEGEL shall mean the present value, as determined in accordance with Section 280G(d)(4) of the Code, of any payment or distribution in the nature of compensation to or for SIEGEL'S benefit, whether paid or payable pursuant to this Agreement or otherwise, net of all taxes imposed on the SIEGEL with respect thereto under Sections 1 and 4999 of the Code, determined by applying the highest marginal rate under Section 1 of the Code. (d) Management Changes. SIEGEL may terminate his employment hereunder upon thirty (30) days written notice at any time within one year following the occurrence of a Management Change, which shall be deemed to have occurred upon the termination of both of Joel R. Schultz and Richard D. Young as President and Senior Executive vice President, respectively of EMPLOYER. Upon termination of employment pursuant to this Section 7(d), SIEGEL shall be entitled to a lump sum payment, to be paid within five (5) days after the date of SIEGEL'S notice pursuant to this Section 7(d), which shall consist of: (i) two 6 7 times the full annual Base Salary plus an amount equal to the last annual bonus paid to SIEGEL for the most recent fiscal year, and (ii) the cash value of all vacation, holiday and sick days which have accrued up to the date of termination. 8. RIGHTS TO PROPRIETARY INFORMATION. (a) For purposes of this Agreement, the term "Proprietary Information" means and includes: 2. all written, oral and visual information about EMPLOYER's customers, clients, employees, consultants and brokers that is not readily known or available to the public, or that SIEGEL learns of or acquires through his employment by EMPLOYER; and 3. financial information, marketing techniques and materials, marketing and development plans, broker lists, customer lists, other information concerning brokers and customers, pricing information and policies, price lists, employee files, corporate and business contacts and relationships, corporate and business opportunities, telephone logs and messages, video or audio tapes and/or disks, photographs, film and slides, including all negatives and positive and prints, computer disks and files, rolodex cards, addresses and telephone numbers, contracts, releases, other writings of any kind, and any and all other materials of a proprietary nature to which SIEGEL is exposed or has access as a consequence of his employment by EMPLOYER. All of the Proprietary Information is, and at all times shall be and remain, private and confidential and is the sole and exclusive property of, and owned and controlled by EMPLOYER, regardless of whether such Proprietary Information is in tangible or intangible form. The parties understand that information that is generally known to the public, or which SIEGEL acquired other than as a consequence of his employment by EMPLOYER, such as in the course of similar employment or work elsewhere shall not be deemed part of the Proprietary Information. (b) All Proprietary Information shall be the sole property of EMPLOYER, its successors and assigns, and EMPLOYER, its successors and assigns shall be the sole owner of all patents, trademarks, service marks and copyrights, and other rights (collectively referred to herein as "Rights") pertaining to Proprietary Information. SIEGEL hereby assigns to EMPLOYER any rights SIEGEL may have or acquire in Proprietary Information or Rights pertaining to the Proprietary Information. SIEGEL further agrees as to all Proprietary Information to assist EMPLOYER or any person designated by it in every necessary or appropriate manner (but at EMPLOYER's expense) to obtain and from time to time enforce Rights relating to said Proprietary Information throughout the universe. SIEGEL will execute all documents for use in applying for, obtaining and enforcing such Rights on such Proprietary Information as EMPLOYER may desire, together with any assumptions thereof to EMPLOYER or persons designated by it. SIEGEL's obligation to assist EMPLOYER or any person designated by it in obtaining and enforcing Rights relating to Proprietary Information shall continue beyond the 7 8 cessation of his employment. It is provided, however, that EMPLOYER shall compensate SIEGEL at a reasonable rate after the cessation of employment for time actually spent by SIEGEL upon EMPLOYER's request for such assistance, at a rate not less than SIEGEL'S last salary rate, on a pro rated per hour basis, in effect on the date of his termination. In the event that EMPLOYER is unable, after reasonable effort, to secure SIEGEL's signature on any document or documents needed to apply for or enforce any Right relating to Proprietary Information, whether because of his physical or mental incapacity or for any other reason whatsoever, SIEGEL hereby irrevocably designates and appoints EMPLOYER and its duly authorized officers and agents as his agents and attorneys-in-fact to act for and in his behalf and stead in the execution and filing of any such application and in furthering the application for an enforcement of Rights with the same legal force and effect as if such acts were performed by SIEGEL. (c) At all times, both during his employment and after the cessation of employment, whether the cessation is voluntary or involuntary, for any reason or no reason, or by disability, SIEGEL will keep in strictest confidence and trust all Proprietary Information, and SIEGEL will not disclose, use, or induce or assist in the use or disclosure of any Proprietary Information or Rights pertaining to Proprietary Information, or anything related thereto, without the prior, express written consent of EMPLOYER, except as may be necessary in the ordinary course of performing his duties as an employee of EMPLOYER. SIEGEL recognizes that EMPLOYER has received and in the future will receive from third parties their confidential, trade secret, or Proprietary Information subject to a duty on EMPLOYER's part to maintain the confidentiality of such information and to use it only in connection with the performance of his duties as an employee of EMPLOYER. SIEGEL agrees that SIEGEL owes EMPLOYER and such third parties, during his employment and thereafter, a duty to hold all such confidential, trade secret, or Proprietary Information in the strictest confidence, and SIEGEL will not disclose, use, or induce or assist in the use or disclosure of any such confidential, trade secret, or Proprietary Information without the prior, express written consent of EMPLOYER, except as may be necessary in the ordinary course of performing his duties as an employee of EMPLOYER consistent with EMPLOYER's agreement with such third party. (d) SIEGEL agrees that all material or other original works of authorship written, created, or developed by SIEGEL in connection with his employment hereunder (whether alone or in conjunction with any other person), and all rights of any and every kind whatsoever in and to the results and proceeds of SIEGEL's services rendered hereunder, whether or not such rights are now known, recognized or contemplated, and the complete, unconditional and unencumbered ownership in and to such materials, results and proceeds for all purposes whatsoever shall be "works for hire," as that term is defined in the United States 8 9 Copyright Act (17 U.S.C. Section 101), and shall be the sole and absolute property of EMPLOYER, its successors and assigns, and SIEGEL agrees that he/she does not have and will not claim to have, either under this Agreement or otherwise, any right, title or interest of any kind or nature whatsoever in or to said property. (e) SIEGEL will promptly disclose to EMPLOYER, and EMPLOYER hereby agrees to receive such disclosures in confidence, all discoveries, developments, designs, improvements, inventions, software programs, processes, techniques, know-how, negative know-how and data, whether or not patentable or registrable under patent, copyright or similar statutes or reduced to practice, made or conceived or reduced to practice or learned by SIEGEL, either alone or jointly with others during the period of his employment, for the purpose of permitting EMPLOYER to determine whether they constitute Proprietary Information, or copyrightable or patentable material. 9. NON-COMPETITION/NON-SOLICITATION. (a) During the period of his employment, SIEGEL will not directly or indirectly engage in any activity which competes with EMPLOYER, or which EMPLOYER shall determine in good faith to be in competition with EMPLOYER or any subsidiary or affiliate of EMPLOYER. In addition, during his employment and after the cessation of employment, SIEGEL will not, alone or in concert with others, or on his own behalf, or on behalf of any other person, in any way use or disclose Proprietary Information in order to solicit, entice, or in any way divert any broker to do business with any competitor of EMPLOYER or any subsidiary or affiliate of EMPLOYER. During his employment, SIEGEL agrees not to plan or otherwise take any preliminary steps, either alone or in concert with others, or on his own behalf, or on behalf of any other person, to set up or engage in any business enterprise that would be in competition with EMPLOYER or any subsidiary or affiliate of EMPLOYER. (b) During his employment and for a period of two (2) years after the cessation of employment, SIEGEL will not, either directly or indirectly, either alone or in concert with others or on his own behalf or on behalf of any other person, solicit, divert, entice, recruit, or employ any employee of or consultant to EMPLOYER, or any subsidiary or affiliate of EMPLOYER, to leave employment with or otherwise terminate employment with EMPLOYER or any subsidiary or affiliate of EMPLOYER or work for any competitor of EMPLOYER or any subsidiary or affiliate of EMPLOYER. (c) SIEGEL recognizes that the immediate and continuous performance of his obligations in this paragraph 9 is extremely important and valuable to EMPLOYER because of the extensive and costly training given to its employees and the knowledge gained by such employees of the Proprietary Information 9 10 used by EMPLOYER in its operations. In the event of his breach of those obligations, SIEGEL therefore agrees that EMPLOYER shall be entitled to estimated or liquidated damages, as defined herein. For each employee of EMPLOYER whom SIEGEL solicits, diverts, recruits, or employs in violation of this paragraph 9, and for each broker or mortgage loan customer of EMPLOYER whom such employee handled for EMPLOYER and whom the employee contacts or otherwise services or works with for his benefit or for the benefit of anyone in privity with SIEGEL, including any competitor of EMPLOYER or any subsidiary or affiliate of EMPLOYER with whom SIEGEL accepts employment in breach of this paragraph 9, SIEGEL shall pay EMPLOYER liquidated damages. The liquidated damages for each such broker or customer shall be (i) the amount of profit earned by EMPLOYER from mortgage loan referrals from each broker, or the amount of profit earned on loans to each mortgage loan customer, during the twelve (12) months immediately preceding termination of such employer with EMPLOYER, and (ii) the amount of cost to EMPLOYER to recruit and train a replacement for each such employee plus the first six (6) month's salary paid to the replacement(s) for such employee. If the employee was not in a position of have contacts with brokers or to otherwise generate business from mortgage loan customers, the liquidated damages shall be the amount of the cost to EMPLOYER to recruit and train a replacement(s) for the employee. SIEGEL further agrees that the cost to recruit and train replacement(s) for each employee as described in this paragraph 9 will be part of EMPLOYER's damages and that the profit formula for employees who had broker or mortgage loan business contact, and the first six (6) months salary paid to the replacement(s) for employees, are conservative estimates of the value, or a portion of the value, of the employee to EMPLOYER. 10. SUCCESSORS; BINDING AGREEMENT. (a) EMPLOYER will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of EMPLOYER to expressly assume and agree to perform this Agreement in the same manner and to the same extent that EMPLOYER would be required to perform it if no such succession had taken place. Any failure of EMPLOYER to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement and shall entitle SIEGEL to compensation from EMPLOYER in the same amount and on the same terms as he would be entitled to hereunder if EMPLOYER were to terminate employment pursuant to Section 7 hereof, except that for purposes of implementing the foregoing, the day before any such succession becomes effective shall be deemed the date that payment is due. As used in this Agreement, "EMPLOYER" shall mean EMPLOYER as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 10 11 (b) This Agreement shall inure to the benefit of, and be enforceable by, SIEGEL'S personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If SIEGEL should die while any amount would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisees, legatee or other designees, or if there is no such designee, to his estate. 11. NOTICES. All notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be deemed to have been given at the time delivered, if personally delivered, or twenty-four hours after deposit thereof for mailing at any general or branch United States Post Office enclosed in a registered or certified postpaid envelope and addressed as follows: If to EMPLOYER: PacificAmerica Money Center, Inc. 21031 Ventura Boulevard Woodland Hills, CA 91364 Attention: Joel R. Schultz, President and Chief Executive Officer with copies to: Jeffer, Mangels, Butler & Marmaro 2121 Avenue of the Stars Los Angeles, CA 90067 Attention: Catherine De Bono Holmes, Esq. and PacificAmerica Money Center, Inc. 21031 Ventura Boulevard Woodland Hills, CA 91364 Attention: Board of Directors If to SIEGEL: CHARLES J. SIEGEL _______________________ _______________________ The parties hereto may designate a different place at which notice shall be given, provided, however, that any such notice of change of address shall be effective only upon receipt. 12. ENTIRE UNDERSTANDING. This Agreement sets forth the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior written or 11 12 oral agreements. This Agreement may not be modified, amended, or terminated except by another instrument in writing executed by the parties hereto. 13. GOVERNING LAW. This Agreement and all rights, obligations and liabilities arising hereunder shall be construed and enforced in accordance with the laws of the State of California. 14. ATTORNEY'S FEES. (a) In the event it becomes necessary to commence any proceeding or action to enforce the provisions of this Agreement, the court before whom such action shall be tried may award to the prevailing party all costs and expenses thereof, including but not limited to reasonable attorneys fees, the usual, customary and lawfully recoverable Court costs, and all other expenses in connection therewith. SIEGEL shall be deemed to be the prevailing party if he is awarded any amounts in any such proceeding or action. (b) EMPLOYER shall also pay and be responsible for all attorneys and related fees, expenses or costs incurred by SIEGEL, if EMPLOYER, or any stockholder of EMPLOYER contests the validity or enforceability of this Agreement or any part hereof. The parties hereto have executed this Agreement on the day and year first above written. "SIEGEL" ________________________________ CHARLES J. SIEGEL "EMPLOYER" PACIFICAMERICA MONEY CENTER, INC. By: _____________________________ Joel R. Schultz President 12 EX-10.13 3 EXHIBIT 10.13 1 EXHIBIT 10.13 FIRST AMENDMENT TO MASTER LOAN PURCHASE AGREEMENT This First Amendment to Master Loan Purchase Agreement (the "Amendment"), dated as of December __, 1996, between PacificAmerica Money Center, Inc., a Delaware corporation, as seller ("Seller"), and Aames Capital Corporation, a California corporation, as purchaser ("Purchaser"), with reference to the following facts: A. Seller and Purchaser are parties to a Master Loan Purchase Agreement (the "Agreement") dated as of October 31, 1996. B. Seller and Purchaser desire to amend the provisions of Section 2.01(a) of the Agreement in the manner set forth herein. NOW, THEREFORE, the parties hereby agree as follows: 1. The last sentence of Section 2.01(a) of the Agreement is hereby deleted in its entirety and replaced with the following: "In the event that any Mortgage Loans are not included in an Aames Mortgage Trust within 120 days after the date that such Mortgage Loans were sold to Purchaser hereunder, Purchaser shall be obligated to consider any offers to purchase the Mortgage Loans presented to it by any unrelated third party. Purchaser shall be required to provide written notice to Seller within one Business Day after the receipt of any offer to purchase the Mortgage Loans, and Seller shall have a right of first refusal, exercisable for a period of thirty days from the date of Seller's receipt of Purchaser's written notice of a third party offer, to repurchase the Mortgage Loans so offered, at a price equal to the applicable Repurchase Price, less any amounts owed by Purchaser to Seller for Interim Net Spread." 2. Except as modified herein, all terms and conditions of the Agreement shall remain in full force and effect without modification, and all of the general terms and conditions of the Agreement, including without limitation the provisions of Article Nine of the Agreement, shall apply to this Amendment. In witness whereof, Seller and Purchaser have each caused this Amendment to be executed on its behalf by its duly authorized officer. PACIFICAMERICA MONEY CENTER, INC. By:_________________________ Charles J. Siegel Chief Financial Officer AAMES CAPITAL CORPORATION By:____________________________ ____________________________ ____________________________ 2 SECOND AMENDMENT TO MASTER LOAN PURCHASE AGREEMENT This Second Amendment to Master Loan Purchase Agreement (the "Amendment"), is made as of January 1, 1997, between PacificAmerica Money Center, Inc., a Delaware corporation, as seller ("Seller"), and Aames Capital Corporation, a California corporation, as purchaser ("Purchaser"), with reference to the following facts: A. Seller and Purchaser are parties to a Master Loan Purchase Agreement (the "Agreement") dated as of October 31, 1996. All capitalized terms referred to in this Amendment and not defined herein have the meanings ascribed to them in the Agreement. B. Seller and Purchaser have agreed that Seller shall have no obligation to deliver the Quarterly Commitment Amount of Mortgage Loans for purchase by Purchaser, as currently provided for in the Agreement, until the date (the "Recommencement Date") which is 30 days after the date that Purchaser notifies Seller that it has implemented a Home Equity Line of Credit ("HELOC") Program in which Seller can originate and sell loans to Purchaser (pre-approved by Purchaser for purchase if required by Seller) with loan-to-value ratios at least five percentage points higher than the loan-to-value ratios currently required under Purchaser's lending Guidelines. Seller and Purchaser therefore desire to amend the Agreement as provided for herein. C. Seller and Purchaser have further agreed that, because only $14,936,821.84 principal amount of loans which have previously been sold to Purchaser are available for securitization in the next Aames Mortgage Trust, the purchase price for such loans will be modified to an amount which is 108% of the total principal balance of such loans on the date of sale thereof (of which 100% of the principal balance of such loans has previously been paid) plus accrued interest and interest payments actually received on such loans from the date of sale until the date of payment of the premium provided for herein, less the Servicing Fee payable to Purchaser and a monthly financing fee determined in accordance with the formula provided in the definition of Interim Net Spread in the Agreement, with no continuing interest of Seller in the Excess Spread or otherwise with respect to such loans. NOW, THEREFORE, the parties hereby agree as follows: 1. The definition of "Quarterly Commitment Amount" contained in Section 1.01 of the Agreement is hereby deleted in its entirety and replaced with the following: "The lesser of (i) the total aggregate principal balance of all HELOC loans made by Seller which are Qualified Mortgage Loans, plus any other Qualified Mortgage Loans which Seller, in its sole discretion, determines to offer to Purchaser, during such Quarterly Commitment Period and (ii) $50 million plus the Aggregate Quarterly Commitment Deficiency." 2. The definition of "Quarterly Commitment Deficiency" contained in Section 1.01 of the Agreement is hereby deleted in its entirety and replaced with the following: "With respect to any Quarterly Commitment Period beginning with the first full quarter which begins after the Recommencement Date, for any Quarterly Commitment Period in which Seller offers for sale to Purchaser pursuant to Section 2.01 Qualified Mortgage Loans with an aggregate Principal Balance less than $50 million, the difference between $50 million and the aggregate Principal Balance of Qualified Mortgage Loans so offered." 3. The first sentence of Section 2.01(a) of the Agreement is hereby deleted in its entirety and replaced with the following: "During the Term of the Agreement, Seller shall offer for sale to Purchaser during each Quarterly Commitment Period, Qualified Mortgage Loans in such 3 amount as Seller shall determine; provided that, after the Recommencement Date, Seller shall offer for sale to Purchaser during each Quarterly Commitment Period all HELOC loans made by Seller which are Qualified Mortgage Loans (pre-approved for purchase by Purchaser if required by Seller), plus any other Qualified Mortgage Loans which Seller, in its sole discretion, determines to offer to Purchaser, during such Quarterly Commitment Period, in an aggregate principal amount of not less than the quarterly Commitment Amount." Seller shall have the right to require that Purchaser pre-approve for purchase by Purchaser all HELOC and companion loans secured by the same property as any HELOC originated by Seller, in which case Purchaser hereby unconditionally agrees to purchase all such loans which are so pre-approved, provided that such loans are Qualified Mortgage Loans. 4. The last sentence of Section 2.01(c) of the Agreement is hereby deleted in its entirety and replaced with the following: "Seller shall have the right to offer and sell any Mortgage Loans offered to Purchaser and not accepted for purchase by Purchaser to other Persons for purchase, securitization or other disposition." 5. Section 2.01(e) is hereby deleted in its entirety and shall hereafter be referred to as [intentionally omitted]. 6. With respect to the $14,936,821.84 principal amount (as determined on the date of sale of such loans, referred to herein as the "Sale Date Principal Balance") of loans previously sold by Seller to Purchaser which have not been included in an Aames Mortgage Trust as of the date hereof (the "1996 Fourth Quarter Loans") Seller and Purchaser agree that the purchase price for such loans shall be modified to equal 108% of the total principal balance of such loans on the date of sale thereof (of which 100% of the principal balance of such loans has previously been paid) plus accrued interest and interest payments actually received on such loans from the date of sale until the date of payment of the premium provided for herein, less the Servicing Fee payable to Purchaser and a monthly financing fee determined in accordance with the formula provided in the definition of Interim Net Spread in the Agreement. Seller and Purchaser further agree that Seller shall have no further interest in the 1996 Fourth Quarter Loans or in the Aames Mortgage Trust in which such loans may be included at any time in the future. However, within 10 days after the date, if any, on which total Loans sold by Seller to Purchaser under the Agreement equal an aggregate Principal Balance of at least $250 million, Purchaser will pay to Seller an additional 3% of the Sale Date Principal Balance of the 1996 Fourth Quarter Loans. All other provisions of the Agreement with respect to the 1996 Fourth Quarter Loans, and the terms of sale of such loans by Seller to Purchaser, shall continue to apply with respect to such loans. 7. Except as modified herein and as necessary to carry out the intentions of the parties as reflected in this Amendment, all terms and conditions of the Agreement shall remain in full force and effect without modification, and all of the general terms and conditions of the Agreement, including without limitation the provisions of Article Nine of the Agreement, shall apply to this Amendment. IN WITNESS WHEREOF, Seller and Purchaser have each caused this Amendment to be executed on its behalf by its duly authorized officer. AAMES CAPITAL CORPORATION PACIFICAMERICA MONEY CENTER, INC. By:___________________________ By:_________________________ Mark Elbaum Charles J. Siegel Senior Vice President - Finance Chief Financial Officer 4 PACIFICAMERICA MONEY CENTER, INC. 21031 Ventura Boulevard, Suite 102 Woodland Hills, California 91364 January 1, 1997 Aames Capital Corporation 3731 Wilshire Boulevard, 10th Floor Los Angeles, California 90010 Attention: Cary Thompson Aames Financial Corporation 3731 Wilshire Boulevard, 10th Floor Los Angeles, California 90010 Attention: Cary Thompson Dear Cary: You are hereby notified that PacificAmerica Money Center, Inc. ("PAMM"), a Delaware corporation, has assigned to Pacific Thrift and Loan Company ("Pacific Thrift"), a California corporation, all of its right, title and interest in and to all of the following payment obligations of Aames Capital Corporation ("Aames") under that certain First Amendment (the "Amendment") dated as of January 1, 1997, to Master Loan Purchase Agreement (the "Aames Agreement"), dated as of October 31, 1996, by and between PAMM and Aames: all obligations of Aames for payment of the adjusted purchase price with respect to the $14,936,821.84 principal amount (as determined on the date of sale of such loans, referred to herein as the "Sale Date Principal Balance") of loans previously sold by PAMM to Aames which have not been included in an Aames Mortgage Trust as of the date hereof (the "1996 Fourth Quarter Loans"). Pursuant to the Amendment, PAMM and Aames have agreed that the purchase price for such loans shall be modified to equal 108% of the total principal balance of such loans on the date of sale thereof (of which 100% of the principal balance of such loans has previously been paid) plus accrued interest and interest payments actually received on such loans from the date of sale until the date of payment of the premium provided for herein, less the Servicing Fee payable to Aames and a monthly financing fee determined in accordance with the formula provided in the definition of Interim Net Spread in the Agreement. PAMM and Aames have further agreed that PAMM shall have no further interest in the 1996 Fourth Quarter Loans or in the Aames Mortgage Trust in which such loans may be included at any time in the future. PAMM has further assigned to Pacific Thrift all of PAMM's right to receive an additional 3% of the Sale Date Principal Balance of the 1996 Fourth Quarter Loans, payable by Aames within 10 days after the date, if any, on which total Loans sold by PAMM to Aames under the Agreement equal an aggregate Principal Balance of at least $250 million. You are hereby instructed to make all such payments, as they become due and payable, to Pacific Thrift. PAMM hereby releases and discharges Aames and AFC from any claim to any payment made by Aames or AFC to Pacific Thrift pursuant to the terms of this letter of instruction. 5 Aames Capital Corporation Aames Financial Corporation January 1, 1997 Page 2 You are further notified that PAMM has assigned to Pacific Thrift all of its rights against AFC pursuant to the Guaranty of AFC dated as of October 31, 1996 with respect to all payments assigned to Pacific Thrift which may become due and payable by AFC for the adjusted purchase price of the 1996 Fourth Quarter Loans pursuant to the Guaranty. You are hereby instructed to make all such payments, as they become due and payable, to Pacific Thrift. PAMM hereby releases and discharges AFC from any claim to any payment made by AFC to Pacific Thrift under the Guaranty pursuant to the terms of this letter of instruction. Very truly yours, JOEL R. SCHULTZ, President EX-10.14 4 EXHIBIT 10.14 1 THIS AMENDED AND RESTATED CORPORATE FINANCE AGREEMENT, amended as of January 27, 1997, among PacificAmerica Money Center, Inc., as seller ("PAM" or the "Seller"), Advanta Mortgage Conduit Services, Inc., ("Buyer") and Advanta Mortgage Corp.USA, as master servicer (the "Master Servicer"), W I T N E S S E T H T H A T : WHEREAS, PAM, through its subsidiaries, is an originator of mortgage loans which PAM desires to include in securitization transactions sponsored by the Buyer; WHEREAS, Buyer desires to include such mortgage loans in its securitization transactions; and WHEREAS, PAM and Buyer desire that the Master Servicer service such mortgage loans. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto hereby agree as follows: Section 1. Definitions. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the meanings specified in this Section. Accumulation Pool: As of any date, all Mortgage Loans previously sold by the Seller hereunder and which are held by the Conduit Acquisition Trust on such date. The Accumulation Pool may represent any number of Pools. Additional Initial Reserve Amount: With respect to any Securitized Loan Pool, any additional amount required to be added to the Reserve Amount in connection with the conveyance of such Securitized Loan Pool to the related Advanta Trust (including conveyances of any "pre-funded" Mortgage Loans). The parties acknowledge that their expectation is that the Additional Initial Reserve Amount will be ________. Additional Representations and Warranties: With respect to any Pool, the additional representations and warranties made by the Seller with respect thereto, as set forth in the related Conveyance Agreement and agreed to by the Buyer and the Seller. Advances: Any "Delinquency Advances" as may be required in connection with a Securitized Loan Pool, as defined in the "Pooling and Servicing" or similar agreement relating to the applicable Advanta Trust, and any Servicing Advances. Advanta Pooling Agreement: Any pooling and servicing or other trust agreement pursuant to which an Advanta Trust is established. Advanta Trust: Any trust which the Buyer may from time to time sponsor for the purpose of securitizing, among other things, all or a portion of the Mortgage Loans and selling the interests therein to investors. Agreement: This Amended and Restated Corporate Finance Agreement and all amendments hereof and supplements hereto. 2 Applicable Pool Parameters: For purposes of this Agreement only (i.e., not necessarily for purposes of the Whole Loan Agreement) those pool parameters set forth on Exhibit D hereto, as such Exhibit D may be revised from time to time by the Buyer. Applicable Pool Balance: With respect to any Pool as of any Distribution Date, the aggregate Principal Balances of the Mortgage Loans in such Pool as of the opening of business on the first day of the prior calendar month. Applicable Rate: With respect to any Mortgage Loan included in the Accumulation Pool, LIBOR plus ______. With respect to any Mortgage Loan included in a Securitized Loan Pool, the "Pass-Through Rate(s)" for the related classes of securities for the related period; such "Pass-Through Rate(s)" may be either the actual rates or, in the case of a derivative, such derivative hedged rate(s). Appraised Value: The appraised value of any Mortgaged Property based upon the appraisal or other valuation made at the time of the origination of the related Mortgage Loan; or, in the case of a Mortgage Loan which is a purchase money mortgage; or in the case of a home which is purchased within the last twelve (12) months, the sale price of the Mortgaged Property at such time of origination, if such sale price is less than such appraised value. ARM Loan: A Mortgage Loan which bears an adjustable rate of interest. Authorized Representatives: As defined in Section 16 hereof. Bond Pricing Discount: An estimated percentage of pricing discount on the publicly-offered securities to be issued by an Advanta Trust, as determined by the Underwriter(s) selected by the Buyer. The parties acknowledge that their expectation is that the Bond Pricing Discount will be _____, or as close to zero as reasonably practicable. If the Bond Pricing Discount is more than _____, the Seller may terminate this Agreement upon 30 days' notice to the Buyer. Business Day: Any day other than (a) a Saturday or a Sunday, or (b) a day on which national banks in the states of California, New York or Delaware are required or authorized by law, executive order or governmental decree to be closed. Buyer Information: As defined in Section 5(d). Carry-Forward Amount: With respect to any Securitized Loan Pool and any Distribution Date, the sum of the excess, if any, of (x) the amount described in clause (y) of the definition of "Deferred Premium Payment" for the immediately preceding Distribution Date over (y) the Residual Cashflow for such Securitized Loan Pool for such immediately preceding Distribution Date. Closing Date: With respect to any Pool, the date established as the "Closing Date" in the related Conveyance Agreement. Combined Loan-to-Value Ratio: With respect to any First Mortgage Loan, the percentage equal to the Original Principal Amount of the related Note divided by the Appraised Value of the related Mortgaged Property and with respect to any Second Mortgage Loan, the percentage equal to (a) the sum (i) the remaining principal balance, as of origination of the Second Mortgage Loan, of the Senior Lien note(s) relating to such 2 3 Second Mortgage Loan, and (ii) the Original Principal Amount of the Note relating to such Second Mortgage Loan, divided by (b) the Appraised Value. Compensating Interest: Amounts advanced by the Master Servicer for the benefit of the Advanta Trust as a result of a prepayment in full by a Mortgagor on a date other than the scheduled Due Date, and equal to the excess of (x) a full month's interest on the related Mortgage Loan calculated at the related Coupon Rate less the Servicing Fee Rate over (y) the interest actually paid by the related Mortgagor for the related monthly period. All amounts advanced for Compensating Interest will be reimbursed to the Master Servicer out of the Residual Cashflows due to the Seller. Conduit Acquisition Trust: The Conduit Acquisition Trust created pursuant to that certain Pooling and Servicing Agreement dated as of February 15, 1995 among the Buyer, the Master Servicer and the Trustee. Conveyance Agreement: With respect to the purchase of a Pool, the Conveyance Agreement in substantially the form of Exhibit A hereto executed with respect thereto. Credit Enhancer: Any financial guarantor or other financial institution which provides third-party credit enhancement with respect to an Advanta Trust. Cut-Off Date: With respect to any Pool, the date established as the "Cut-Off Date" in the related Conveyance Agreement. Cut-Off Date Principal Balance: As to any Mortgage Loan, its Principal Balance as of the opening of business on the related Cut-Off Date. Defect: As to any Mortgage Loan, (a) a failure of any document in the Mortgage File to correspond substantively to the information set forth on the Mortgage Loan Schedule or (b) the absence of a required document or required information from a Mortgage File if such failure or absence in the reasonable opinion of the Buyer materially and adversely affects the collectibility or value of the Mortgage Loan. Defective Mortgage Loan: Any Mortgage Loan which is required to be repurchased by the Seller pursuant to Section 5(b), 5(c), 6(b) or 8(c) hereof. Deferred Premium Payment: With respect to any Securitized Loan Pool and any Distribution Date, the excess, if any, of (x) the Residual Cashflow for such Distribution Date over (y) the sum of (i) the Initial Premium Amortization Current Amount plus (ii) the related Initial Premium Fee plus (iii) the Carry-Forward Amount, if any, for such Distribution Date. Delinquency Advances: For each remittance period for the related Securitization, an amount equal to the sum of the interest portions (net of the Servicing Fees) due, but not collected, with respect to delinquent Mortgage Loans, which the Master Servicer advances to the Trust. The Master Servicer is only required to make Delinquency Advances if the Master Servicer believes, in its good faith business judgment, that such amount will ultimately be recovered from the related Mortgage Loan. Distribution Date: With respect to the Accumulation Pool or any Securitized Loan Pool, the 25th day of each month or, if such day is not a Business Day, the Business 3 4 Day immediately following such 25th day, beginning in the month specified in the related Conveyance Agreement. Due Date: With respect to any Mortgage Loan the fixed date in each month on which the Mortgagor's Monthly Mortgage Payment is due. Excess Interest means: (x) with respect to the Accumulation Pool, as of any Distribution Date, the sum of all interest due (minus the amount of any interest not required to be advanced by the Master Servicer as a non-recoverable "Delinquency Advance") with respect to the Mortgage Loans in the Accumulation Pool during the prior calendar month (minus any portion of such interest previously received by the Seller as part of the related Pool Purchase Price), less the sum of the following amounts, to be deducted in the following order of priority: (i) the Monthly Fee with respect to the Accumulation Pool; (ii) one-twelfth of the Servicing Fee Rate times the related Applicable Pool Balance; (iii) the interest, calculated at the Applicable Rate, which accrued on the Applicable Pool Balance which relates for the applicable preceding interest accrual period; and (iv) the amount of any Advances, including, but not limited to, Nonrecoverable Advances, made or paid by the Master Servicer with respect to any Mortgage Loans included in the Accumulation Pool during the prior calendar month less the amount of any Delinquency Advances made or paid by the Master Servicer on prior monthly periods and recovered during the current monthly period; and (y) with respect to any Securitized Loan Pool, as of any Distribution Date, the sum of all interest due with respect to the Mortgage Loans in such Securitized Loan Pool (minus the amount of any interest not required to be advanced by the Master Servicer as a non-recoverable "Delinquency Advance"), during the prior calendar month (minus any portion of such interest previously received by the Seller as part of the related Pool Purchase Price), less the sum of the following amounts, to be deducted in the following order of priority: (i) the Monthly Fee with respect to the Securitized Loan Pool; (ii) one-twelfth of the Servicing Fee Rate times the related Applicable Pool Balance; (iii) the sum of (x) the interest, calculated at the Applicable Rate for the related ARMs, which accrued on that portion of the Applicable Pool Balance which relates to ARMs, plus (y) the interest, calculated at the Applicable Rate for the related Fixed Rate Loans, which accrued on that portion of the Applicable Pool Balance which relates to Fixed Rate Loans, 4 5 in each case for the applicable preceding interest accrual period; and (iv) the amount of any Advances (including, but not limited to, Nonrecoverable Advances) and Compensating Interest made or paid by the Master Servicer with respect to any Mortgage Loans included in the Securitized Loan Pool during the prior calendar month less the amount of any Delinquency Advances and Compensating Interest made or paid by the Master Servicer on prior monthly periods and recovered during the current monthly period. FDIC: The Federal Deposit Insurance Corporation and its successors in interest. FEMA: The Federal Emergency Management Agency and its successors in interest. FHLMC: The Federal Home Loan Mortgage Corporation and its successors in interest. First Mortgage Loan: A Mortgage Loan which constitutes a first priority mortgage lien with respect to any Mortgaged Property. Fixed Rate Loan: A Mortgage Loan which bears interest at a fixed rate. FNMA: The Federal National Mortgage Association and its successors in interest. Initial Premium Amortization Amount Schedule: With respect to any Securitized Loan Pool, a schedule setting forth all Initial Premium Amortization Current Amounts for each Distribution Date. Initial Premium Amortization Current Amount: With respect to any Securitized Loan Pool (i) for each Distribution Date occurring during the amortization period (which shall in no event be less than 36 months or greater than 48 months) set forth in the related Securitization Statement, the amount set forth with respect to such Distribution Date in the Initial Premium Amortization Amount Schedule attached to the related Securitization Statement and (ii) with respect to each Distribution Date thereafter, the related Unamortized Initial Premium Amount immediately prior to such Distribution Date. Initial Premium Fee: With respect to any Distribution Date, the product of (i) ______ of the sum of (a) ______ (b) ______ and (ii) the related Unamortized Initial Premium Amount immediately prior to such Distribution Date. Initial Premium Payment: An amount paid to the Seller on the closing date of the related Advanta Securitization equal to the product of (i) the related Initial Premium Percentage and (ii) the aggregate Principal Balance of all Qualifying Loans purchased by the Buyer as of the closing date of a Securitization. Initial Premium Percentage: With respect to each Securitized Loan Pool, the percentage indicated as the Initial Premium Percentage in the related Securitized Statement, which percentage shall not be less than ______. 5 6 Initial Reserve Amount: With respect to any Securitized Loan Pool, the initial amount of Reserves relating thereto, as set forth in the related Conveyance Agreement and based upon an initial review by the Credit Enhancer. The parties acknowledge that their expectation is that the Initial Reserve Amount will be ______. Insurance Policy: Any hazard, flood, title or primary mortgage insurance policy relating to a Mortgage Loan. Insurance Proceeds: Proceeds paid by any insurer and received by the Master Servicer during the prior calendar month pursuant to any insurance policy covering a Mortgage Loan or the related Mortgaged Property, and the proceeds from any fidelity bond or errors and omission policy, net of any component thereof covering any expenses incurred by or on behalf of the Master Servicer. Issuance Costs: With respect to any Securitized Loan Pool, all costs incurred by the Seller and by the Buyer in connection with the purchase and sale of a Pool, the establishment of the related Advanta Trust and the sale of mortgage-backed securities by such Advanta Trust, including, without limitation, legal, accounting, printing, initial Trustee's fee, the Underwriter's discount, initial Credit Enhancer's fee, Rating Agency's fees and other customary costs of issuance. LIBOR: With respect to each Distribution Date, one-month London Interbank Offered Rate as set forth in the Wall Street Journal as of the prior Business Day. Liquidated Mortgage Loan: As to any Distribution Date, any Mortgage Loan as to which the Master Servicer has determined, in accordance with its regular servicing practices during the prior calendar month, that all Liquidation Proceeds which it expects to recover from or on account of such Mortgage Loan have been recovered, which determination may include "charging off" such Mortgage Loan. Liquidation Expenses: Expenses which are incurred by the Master Servicer in connection with the liquidation or foreclosure of any Mortgage Loan and not recovered under any insurance policy or from any Mortgagor. Such expenses shall include, without limitation, legal fees and expenses, real estate brokerage commissions, any unreimbursed amount expended by the Master Servicer respecting the related Mortgage Loan (including, without limitation, amounts voluntarily advanced to correct defaults on each related Senior Lien) and any related and previously unreimbursed Advances. Liquidation Proceeds: Cash (other than Insurance Proceeds) received in connection with the liquidation of any Mortgaged Property, whether through trustee's sale, foreclosure sale or otherwise received in respect of any Mortgage Loan foreclosed upon (including, without limitation, proceeds from the rental of the related Mortgaged Property). Master Commitment: The Master Commitment for Corporate Finance Relationships dated as of December 16, 1996 among the Buyer and the Seller hereto. Master Servicer: Advanta Mortgage Corp. USA, a Delaware corporation. Monthly Fee: As defined in Section 4(a) hereof. Monthly Mortgage Payment: With respect to any Mortgage Note, the amount of each fixed monthly payment (other than final balloon payments) payable under such Mortgage Note in accordance with its terms, net of any portion of such monthly payment 6 7 that represents late payment charges, prepayment or extension fees or collections allocable to payments to be made by Mortgagors for payment of insurance premiums, real estate taxes or similar items. Mortgage: The mortgage, deed of trust or other instrument creating a first, second or third lien on an estate in fee simple interest in real property securing a Mortgage Loan. Mortgage File: With respect to any Mortgage Loan, the items set forth on Exhibit B hereto. Mortgage Loan: Each of the Mortgage Loans sold by the Seller hereunder. Mortgage Loan Rate: As to any Mortgage Loan, the per annum rate of interest applicable to the calculation of interest thereon. Mortgage Loan Schedule: With respect to any Pool, the schedule of Mortgage Loans delivered by the Seller with respect thereto on the related Closing Date. Each such schedule shall be delivered in computer-readable form on diskette or magnetic tape and in physical form, as amended from time to time. Mortgage Note: The note or other instrument of indebtedness evidencing the indebtedness of a Mortgagor under the related Mortgage Loan. Mortgaged Property: The underlying property securing a Mortgage Loan. Mortgagor: The obligor under a Mortgage Note. Net Insurance Proceeds: Insurance Proceeds from any policy of insurance covering a Mortgage Loan which (a) are applied by the Master Servicer to reduce the Principal Balance of the related Mortgage Loan and (b) not applied to the restoration or repair of the related Mortgaged Property or released to the related Mortgagor in accordance with the Master Servicer's regular servicing procedures or the terms of the related Mortgage Loan. Net Liquidation Proceeds: As to any Mortgage Loan, Liquidation Proceeds net of Liquidation Expenses. For all purposes of this Agreement, Net Liquidation Proceeds shall be allocated first to accrued and unpaid interest on the related Mortgage Loan and then to the Principal Balance thereof. Nonrecoverable Advances: With respect to any Mortgage Loan, any Delinquency Advance and any Servicing Advance previously made and not reimbursed which, in the good faith business judgment of the Master Servicer, would not be ultimately recoverable. Offering Document: A prospectus, placement memorandum or other document pursuant to which an Underwriter offers mortgage- backed securities issued by an Advanta Trust. Original Principal Amount: With respect to any Mortgage Note, the original principal amount due under such Mortgage Note as of its date of origination. 7 8 Other Expenses: Any additional expenses incurred by the Buyer in connection with the inclusion of the Seller's Mortgage Loans sold by the Seller in an Advanta Trust, including, but not limited to the costs of (i) data integrity review of loan files versus the servicing system, (ii) accountant's "comfort letter" with respect to any of the Seller Information and (iii) third-party due diligence expenses relating to on-site review of the Seller or the Mortgage Loans, to the extent over and above the Buyer's normal expenses for items (i), (ii) and (iii). Pair-Off Fee: As defined in the Master Commitment for Corporate Finance Relationships, dated as of December 16, 1996 between the Seller and the Buyer. Person: Any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Pool: Any group of Mortgage Loans sold by the Seller hereunder and designated as a "pool" for purposes of this Agreement. For convenience, each Pool shall be designated by the year of its sale and lettered sequentially, e.g., 1996-A, 1996-B, etc. Pool Principal Balance: As of any date, the aggregate Principal Balances of all Mortgage Loans in the related Pool as of such date. Pool Purchase Price: With respect to any Pool, the sum of (x) the aggregate Principal Balance of each Mortgage Loan in such Pool as of the opening of business on the related Cut-Off Date and (y) for each Mortgage Loan, interest accrued on the amount described in clause (x) from and including the date to which interest was last paid by the Mortgagor (including any prepaid interest) to but excluding the Closing Date, calculated at the related Mortgage Loan Rate and minus the Initial Servicing Expenses set forth on Exhibit L attached hereto. Principal Balance: As to any Mortgage Loan and any date of determination, the Principal Balance thereof as of the related Cut-Off Date, less all amounts theretofore applied in reduction of such Principal Balance after the related Cut-Off Date; provided, however, that a Mortgage Loan that has become liquidated will be deemed to have a Principal Balance of _______. Principal Payment: As to any Mortgage Loan and calendar month, all amounts received or, deemed to have been received by the Master Servicer from or on behalf of the related Mortgagor during such calendar month (including Principal Prepayments) which, at the time of receipt or at the time deemed to have been received, were applied or were required to be applied by the Master Servicer in reduction of the Principal Balance of such Mortgage Loan. Principal Prepayment: As to any Mortgage Loan and calendar period, any Mortgagor payment or other recovery in respect of principal on a Mortgage Loan (including Net Liquidation Proceeds) which, in the case of a Mortgagor payment, is received in advance of its Due Date and is not accompanied by an amount as to interest representing scheduled interest for any month subsequent to the month of such payment or was accompanied by instructions from the related Mortgagor directing the Master Servicer to apply such payments to the Principal Balance of such Mortgage Loan. 8 9 Qualified Mortgage: "Qualified Mortgage" shall have the meaning set forth from time to time in the definition thereof at Section 860G(a)(3) of the Internal Revenue Code of 1986, as amended (or any successor statute thereto). Qualifying Loan: Mortgage Loans which (i) conform to the Applicable Guidelines, and (ii) which conform to all Representations and Warranties, as defined in this Agreement and applicable to the related Mortgage Loans. Rating Agencies: Collectively, all nationally recognized statistical credit rating agencies providing a rating on any class of mortgage-backed securities issued by an Advanta Trust. Realized Loss: As to any Liquidated Mortgage Loan, the excess, if any, of (x) the Principal Balance thereof as of the date of liquidation, together with all unreimbursed Advances over (y) the related Net Liquidation Proceeds, if any. Related Conduit Agreements: As defined in the Master Commitment. Remaining Excess Interest: With respect to any Securitized Loan Pool as of any Distribution Date, the excess, if any, of (x) the Excess Interest for such Securitized Loan Pool over (y) the Reserve Deposit for such Securitized Loan Pool. REO Property: Any Mortgaged Property as to which title has become vested in the Trustee, the Conduit Acquisition Trust or an Advanta Trust as a result of foreclosure, deed in lieu of foreclosure, etc. Representations and Warranties: As defined in Section 8(a) hereof. Repurchase Price: With respect to any Mortgage Loan repurchased by the Seller pursuant to the provisions hereof, an amount equal to (i) the sum of (A) the Principal Balance of such Mortgage Loan as of the beginning of the calendar month next preceding the Distribution Date on which the proceeds of such repurchase or purchase are required to be distributed, (B) interest computed at the applicable Mortgage Loan Rate on such Principal Balance from the date to which interest was last paid by the Mortgagor to the end of the calendar month immediately preceding such Distribution Date on which such repurchase or purchase occurs and (C) any previously unreimbursed Advances made on or in respect of such Mortgage Loan less (ii) any payments of principal and interest in respect of such Mortgage Loan, made by or on behalf of the related Mortgagor during such calendar month. Reserve Amount: With respect to the Accumulation Pool or any Securitized Loan Pool, as of any Distribution Date the excess of (x) the sum of (i) the Initial Reserve Amount(s) for the related Pool(s), (ii) any Additional Initial Reserve Amount and (iii) the aggregate, cumulative amount of Reserve Deposits applicable to the Accumulation Pool or such Securitized Loan Pool, as the case may be and (iv) investment earnings at Advanta Corp.'s then-standard reinvestment rate over (y) the sum of (i) the aggregate, cumulative amount of Realized Losses experienced with respect to the related Pool(s) since their sale by the Seller reduced by any amounts described in clause (y) of Section 9(d) hereof which have previously been applied in respect of such Realized Losses, (ii) the aggregate, cumulative amount of Reserve Release Amounts distributed to the Seller on all prior Distribution Dates and (iii) any amount described in the second sentence of Section 9(b) hereof which are paid to the Seller. 9 10 Reserve Deposit: With respect to the Accumulation Pool or any Securitized Loan Pool, on any Distribution Date, the lesser of (x) the related Excess Interest for such Distribution Date or (y) any related Reserve Shortfall for such Distribution Date. Reserve Release Amount: As of any Distribution Date and with respect to any Securitized Loan Pool, the excess of (x) the related Reserve Amount on such Distribution Date, after taking into account all credits to, and deductions therefrom on such Distribution Date over (y) the related Reserve Requirement for such Distribution Date. Reserve Requirement: With respect to any Securitized Loan Pool and Distribution Date, the required amount of Reserves for such Distribution Date. In no event shall the level of the Reserve Requirement exceed the level that would be required by the related Credit Enhancer, if the Seller were to do a stand-alone transaction. Reserve Shortfall: With respect to any Securitized Loan Pool, on any Distribution Date, any excess of (x) the related Reserve Requirement for such Distribution Date over (y) the related Reserve Amount immediately prior to such Distribution Date. Reserves: The amount of any first-loss protection maintained with respect to any Pool or group of Pools. Residual Cashflow: With respect to any Securitized Loan Pool as of any Distribution Date, the Residual Cashflow for any Distribution Date shall equal the Remaining Excess Interest, if any, for such Securitized Loan Pool and such Distribution Date plus the aggregate Reserve Release Amount, if any, for such Distribution Date plus any prepayment fees collected for such Distribution Date. Second Mortgage Loan: A Mortgage Loan which constitutes a second priority mortgage lien with respect to the related Mortgaged Property. Securitization: A periodic securitization of mortgage loans by the Buyer. Securitization Statement: Each statement delivered to the Seller by the Buyer at the time of establishment of an Advanta Trust containing Mortgage Loans sold by the Seller hereunder, which statement shall set forth the final Reserve Requirement for the related Securitized Loan Pool, the Pass-Through Rate(s) applicable to such Securitized Loan Pool and related information. Securitized Loan Pool: Any group of Mortgage Loans sold by the Seller hereunder and held by a particular Advanta Trust, whether acquired initially by such Advanta Trust or subsequently acquired through "pre-funded" purchases. A Securitized Loan Pool may represent any number of Pools. Seller: PacificAmerica Money Center, Inc., a Delaware corporation. Seller Information: As defined in Section 5(d) hereof. Seller's Applicable Guidelines: The loan policies and guidelines adopted by the Seller in its discretion for its loan origination activities. Seller's Transaction Expenses: With respect to any Securitized Loan Pool, the Seller's pro rata share (based upon the relative aggregate principal balances of the Mortgage Loans sold by the Seller to the total aggregate principal balance for all mortgage 10 11 loans in such Securitized Loan Pool) of the Issuance Costs, which shall be a maximum of _____ times the aggregate Principal Balance of the related Mortgage Loans. Senior Lien: With respect to any Second Mortgage Loan, the mortgage loan relating to the corresponding Mortgaged Property having a first priority lien. Servicing Advance: Any out-of-pocket costs or expenses incurred by the Master Servicer in connection with the performance of its servicing obligations, including, but not limited to, preservation expenses, payments for taxes and insurance, and payments made to Senior Lien holders, enforcement and judicial proceedings, including foreclosures, the management and liquidation of "REO" Properties, etc. Servicing Fees: As of any Distribution Date, ______ basis points times the Applicable Pool Balance of the Accumulation Pool or the Securitized Loan Pool. Servicer will be entitled to retain additional servicing compensation for incidental fees or charges provided for in the applicable Note and/or Mortgage that are customarily collected from the Mortgagor or charged by the Servicer in the ordinary course of performing its obligations herein, including, but not limited to, late payment charges, assumption processing charges and assumption fees, modification charges or fees, demand fees, insufficient funds fees, reconveyance charges, tax service fees, fees for statement of account or payoff of Mortgage Loans. Total Loan-to-Value Ratio: With respect to any Mortgage Loan, the percentage equal to the sum of (i) the Original Principal Amount of the related Note and (ii) the remaining principal balance(s), as of origination of such Mortgage Loan, of all other note(s) secured by liens, whether senior or subordinate, on the related Mortgaged Property, divided by the Appraised Value of the related Mortgaged Property. Trustee: The trustee designated by the Buyer. Unamortized Initial Premium Amount: With respect to any Securitized Loan Pool and any Distribution Date, the original related Initial Premium Payment minus (i) the aggregate, cumulative amount of the related Residual Cashflow applied in respect of the amortization thereof on previous Distribution Dates pursuant to Section 9(d) hereof and minus (ii) the aggregate, cumulative amounts applied in respect of the amounts described in clause (z) of Section 9(d) hereof on previous Distribution Dates. Underwriter: Collectively, any underwriters or placement agents engaged or consulted by the Buyer in connection with the sale of mortgage-backed securities by an Advanta Trust. Whole Loan Agreement: The Master Loan Purchase Agreement dated as of July 31, 1995 among the parties hereto. Whole Loan Purchases: A pool of Mortgage Loans purchased pursuant to the Whole Loan Agreement. Section 2. Interest Calculations. All calculations of interest hereunder, including, without limitation, calculations of interest at the Mortgage Loan Rate, which are made in respect of the Principal Balance of a Mortgage Loan shall be made on a daily basis using a 360-day year, except to the extent that any different convention (e.g., "actual/360", "actual/365") is used with respect to any securities issued by an Advanta Trust. 11 12 Section 3. Purchases and Sales. (a) Purchases and Sales hereunder shall generally be governed by the terms of the Master Commitment. (b) Purchases of Qualifying Loans under this Agreement shall occur in minimal Pool sizes of $________ aggregate Principal Balance. Offers of Pools, document review, servicing transfer and settlement shall initially be performed by following the same procedures set forth in the Whole Loan Agreement, as such procedures may be revised from time to time upon mutual agreement of the Buyer and the Seller. (c) To consummate a proposed purchase the Seller and the Buyer on behalf of the Conduit Acquisition Trust shall, on or prior to the related Closing Date, execute and deliver a Conveyance Agreement with respect to the related Pool in substantially the form of Exhibit A hereto. On the related Closing Date the Buyer shall cause the Pool Purchase Price for the related Pool to be wired to the Seller in immediately available funds. (d) In connection with each purchase of a Pool the Conduit Acquisition Trust shall, pursuant to the related Conveyance Agreement, purchase all of the Seller's right, title and interest to each Mortgage Loan, including all interest accruing thereon and principal received on or with respect to such Mortgage Loan on or after the related Cut-Off Date. (e) The Seller agrees to cause its records relating to the Mortgage Loans to indicate that the Mortgage Loans have been sold to the Conduit Acquisition Trust. The Seller will treat each sale of a Pool as a sale for generally accepted accounting purposes, will reflect such sale on its accounting records, and shall furnish to the Buyer, in connection with the execution of each Conveyance Agreement an officer's certificate certifying to the Seller's treatment of the transactions contemplated hereby as sales, and such other matters as the Buyer may reasonably request. The Seller may, at its option, elect an appropriate treatment of the transactions contemplated hereby for tax purposes. (f) Prior to the purchase of the first Pool purchased hereunder the Seller shall cause to be provided to the Buyer and the Trustee an opinion of counsel in a form approved by the Buyer relating to the execution and delivery of this Agreement by the Seller and attached hereto as Exhibit G. In connection with each subsequent execution of a Conveyance Agreement, the Seller shall provide to the Buyer and the Trustee an officer's certificate in a form approved by the Buyer as to certain legal and factual matters with respect to such sale. (g) The Seller shall cause at least ____ (by number of loans) of each Pool to be reviewed in accordance with quality control procedures which are standard in the residential mortgage loan industry. Such review may be undertaken by employees of the Seller or of the Buyer or its affiliates, as determined by the Seller. Copies of all quality control review reports shall be furnished to the Buyer on request. Section 4. Fees and Expenses. (a) On each Distribution Date the Buyer shall receive a monthly fee ("Monthly Fee"), with respect to each Accumulation Pool and each Securitized Loan Pool, from cashflows on the related Pool, equal to ______ basis points times the Applicable Pool Principal Balance as of the first day of the prior calendar month. 12 13 Any amounts due to the Buyer or to the Master Servicer hereunder or under the Whole Loan Agreement, including, but not limited, to the fees described above, and the Pair-Off Fee, and any hedging costs, and not paid when due, shall remain payable by the Seller. Such amounts may be funded from any Residual Cashflow otherwise due to the Seller, or offset against any amounts otherwise payable to the Seller by the Buyer or the Master Servicer. (b) The Seller shall pay all the fees and expenses of Dewey Ballantine up to a maximum of $______ incurred in connection with the preparation of this Agreement, at the time of execution and delivery of this Agreement. (c) All expenses of recording assignments of mortgage shall be paid by the Seller. Section 5. Establishment of Advanta Trusts. (a) Except as provided below in this Section 5(a), in connection with the creation of an Advanta Trust the Buyer shall cause the Conduit Acquisition Trust to convey to such Advanta Trust at least ____ of all Qualifying Loans then held in the Accumulation Pool as of the cut-off date for such Advanta Trust. It is the Buyer's current intention to sponsor Advanta Trusts on a quarterly basis. In the event that any Qualifying Loans are not conveyed to an Advanta Trust within ____ days of the date they are purchased by the Buyer hereunder, Buyer shall consider any offers to purchase such Qualifying Loans presented to it by any unrelated third party; provided, that nothing in this Section 5(a) shall be construed to require the Buyer to solicit offers to purchase such loans. Buyer shall be required to provide written notice within ____ Business Days after the receipt of any offer to purchase the Qualifying Loans, and Seller shall have a right of first refusal, exercisable for a period of ____ Business Days from the date of Seller's receipt of Purchaser's written notice of a third party offer, to repurchase the Qualifying Loans so offered, at a price equal to the Repurchase Price. In connection with any conveyance of loans to an Advanta Trust, the Buyer, the related Underwriter(s) and the related Credit Enhancer, shall establish the related Pass-Through Rate(s) and Reserve Requirement applicable to such Mortgage Loans. The Seller shall pay the applicable Bond Pricing Discount and the applicable Other Expenses at the time of the establishment of the related Advanta Trust (which amounts may be offset against any amounts due to the Seller). In connection with the conveyance of any Mortgage Loans to an Advanta Trust the Buyer shall furnish the Seller with the related Securitization Statement. If the inclusion in an Advanta Trust of Mortgage Loans sold hereby would adversely impact the overall Reserve Requirements or pricing relating to such Advanta Trust, the Buyer, after consulting with the Seller, may segregate such Mortgage Loans as a separate pool and/or "REMIC" in such Advanta Trust, and (but shall not be required to) issue specified classes of securities with respect to such Mortgage Loans. The parties acknowledge their expectation that no such separate treatment should be necessary with respect to Mortgage Loans which are Qualifying Loans. In case such separate treatment is required, the Seller shall have the right to repurchase such loans, sell such loans pursuant to the Whole Loan Agreement or leave the loans in the Advanta Trust. Each such separate pool and/or "REMIC" will have its own Pass-Through Rate and its own Reserve 13 14 Requirement. Any additional costs relating to such a structure shall constitute "Seller's Transaction Expenses" payable by the Seller. The Seller shall have the right, prior to the "cut-off-date" for the related Advanta Trust, to substitute for any Mortgage Loan described in the preceding paragraph a replacement Mortgage Loan of similar or better characteristics and unpaid Principal Balance of equal or lesser amount acceptable to the Buyer and which is eligible for inclusion in such Advanta Trust. If for any reason, any Qualifying Loans offered for purchase under the Agreement cannot be included in an Advanta Trust, in addition to Seller's other rights set forth herein, Seller shall have the right to sell such Qualifying Loans to Buyer pursuant to the Whole Loan Agreement. (b) If, in connection with the establishment of an Advanta Trust, any Mortgage Loan in a Securitized Loan Pool is ____ or more days contractually delinquent and such Mortgage Loan is determined by the Buyer to be ineligible for inclusion in such Advanta Trust, the Buyer shall promptly inform the Seller, and the Seller shall have the option to repurchase such Mortgage Loan in accordance with the provisions of this Section 5 prior to the closing date of such Advanta Trust, to substitute for such Mortgage Loan a replacement Mortgage Loan of similar or better characteristics and with an unpaid Principal Balance of equal or lesser amount reasonably acceptable to the Buyer and which is eligible for inclusion in such Advanta Trust, or to have such ineligible Mortgage Loan remain in the Accumulation Pool. The Seller shall have the further right, but not the obligation to repurchase any Mortgage Loan in an Accumulation Pool which is ____ or more days contractually delinquent. In connection with any such repurchase the Seller shall deliver the Repurchase Price to the Buyer. In connection with any such substitution the Seller shall deliver the substitute Mortgage Loan and the items which constitute the related Mortgage File to the Trustee, and shall deliver to the Buyer the excess of (x) the outstanding Principal Balance of the replaced Mortgage Loan over (y) the outstanding Principal Balance of the substitute Mortgage. In connection with any such repurchase or substitution the Buyer shall cause the Conduit Acquisition Trust to reconvey the repurchased or replaced Mortgage Loan to the Seller in the manner described in Section 6(b) hereof. (c) Upon the reasonable request of the Buyer, the Seller shall supply to the Buyer access to, and information regarding, the Seller, the Mortgage Loans, the Seller's underwriting practices, financial condition and related matters. The Seller hereby represents and warrants to the Buyer that any such information so furnished by the Seller ("Seller Information") shall be true, correct and complete in all material respects. If requested by the Buyer or Underwriter's counsel, the Seller shall cause a nationally recognized accounting firm to provide the Buyer with a letter in a form acceptable to Buyer with respect to any Seller Information. The Seller agrees to comply with any reasonable regulatory and quality control requirements requested by the Buyer based upon the Buyer's review of Seller Information and other review of the Seller's origination activities. The Seller shall indemnify and hold the Buyer harmless from any losses suffered by the Seller and its affiliates as a result of (i) any misstatement in, or omission from, any Seller Information or (ii) any breach by Seller of any representation or warranty set forth in Section 7(a) hereof but only as it relates to Seller's performance and obligations under this Agreement. 14 15 The Buyer shall indemnify and hold Seller and its affiliates harmless from any losses suffered by the Seller as a result of (i) any misstatement in, or omission from any Buyer Information or (ii) any breach by the Buyer of any representation or warranty set forth in Section 7(b) hereof but only as it relates to the Buyer's performance and obligations under this Agreement. "Buyer Information" means any information in any Offering Document other than Seller Information. (d) The Seller agrees to cooperate reasonably and in good faith with the Buyer, its attorneys and accountants, Credit Enhancers, Underwriters and Rating Agencies in connection with the establishment of each Advanta Trust. The Buyer agrees to cooperate reasonably with the Seller, its attorneys and accountants in connection with the transfer of Qualifying Loans to an Advanta Trust. (e) The Buyer acknowledges to the Seller that it is the Buyer's present intent to sponsor Advanta Trusts quarterly; the Buyer shall advise the Seller of any change in such intent as soon as possible. If the Buyer fails to sponsor quarterly securitizations, the Seller may terminate this Agreement upon ____ days' written notice to the Buyer. (f) The Seller acknowledges that, to the extent it, at or prior to the time of the formation of a Securitized Loan Pool, elects not to repurchase any Mortgage Loan pursuant to its repurchase options set forth in this Section 5, the Reserve requirements and/or the Initial Reserve Amount applicable to the related Securitized Loan Pool is likely to increase substantially. Section 6. Defective Mortgage Files; Repurchase of Mortgage Loans. (a) If the Seller is informed by the Trustee, the Master Servicer or the Buyer that any material document constituting a part of a Mortgage File has not been executed or received or is unrelated to the Mortgage Loans identified in the related Mortgage Loan Schedule, the Seller shall have a period of ____ days after such notice within which to correct or cure any such Defect. (b) If the Trustee, Credit Enhancer, the Master Servicer or the Buyer has notified the Seller of a Defect in a Mortgage File and the Defect remains uncured to the satisfaction of the Buyer, the Seller shall, not later than ____ days after receipt of notice of such Defect, and provided that such Defect has not been cured to the Buyer's reasonable satisfaction, repurchase the related Mortgage Loan (including any property acquired in respect thereof and any insurance policy or insurance proceeds with respect thereto) at a price equal to the Repurchase Price, which shall be accomplished by delivery of such amount by the Seller to the Buyer. Upon receipt by the Buyer of the Repurchase Price for a Defective Mortgage Loan, the Buyer shall cause the Conduit Acquisition Trust to execute and deliver such instrument of transfer or assignment presented to it by the Seller, in each case without recourse, as shall be necessary to vest in the Seller legal and beneficial ownership of such repurchased Defective Mortgage Loan (including any property acquired in respect thereof or insurance policy or insurance proceeds with respect thereto). (c) In the event that the Seller fails, within the time periods specified in this Agreement, to cure any material Defect in a Mortgage File, the Buyer, in addition to any rights it may have under paragraph (b) above, shall have the right thereafter to receive any Residual Cashflow otherwise payable to the Seller, but not more than the actual loss suffered by the Buyer. The Buyer shall make a good faith effort to collect any amounts due by the Obligor in order to mitigate any actual loss that may be suffered by the Buyer; 15 16 provided, that if the Buyer adheres to its servicing guidelines, this shall be considered conclusive evidence of good faith. (d) The remedies described in paragraphs (b) and (c) above, together with all other remedies the Buyer may have at law or in equity, shall survive any resignation or termination of Advanta Mortgage Corp. USA as Master Servicer. Section 7. Representations and Warranties Regarding the Seller, the Buyer and the Master Servicer. (a) The Seller hereby represents and warrants to the Buyer, the Master Servicer and their respective successors and assigns that, as of the date hereof: (i) The Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all licenses and qualifications necessary to carry on its business as now being conducted and to perform its obligations hereunder; the Seller has the power and authority to execute and deliver this Agreement and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement (including any Conveyance Agreement and any other instruments of transfer to be delivered pursuant to this Agreement) by the Seller and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of the Seller, contravene or violate any law or regulation applicable to the Seller or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of the Seller pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which the Seller is a party or which purports to be binding upon the Seller or any of the Seller's assets; this Agreement and the Related Conduit Agreements evidence the valid and binding obligation of the Seller enforceable against the Seller in accordance with their terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; the Seller is in good standing as a foreign corporation in each jurisdiction in which the nature of its business, or the properties owned or leased by it make such qualification necessary; (ii) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the Seller of this Agreement or the Related Conduit Agreements, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement on the part of the Seller and the performance by the Seller of its obligations under this Agreement or the Related Conduit Agreements; (iii) There is no action, suit, proceeding or investigation pending or, to the best of the Seller's knowledge, threatened against the Seller which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition of the Seller or in any material 16 17 impairment of the right or ability of the Seller to carry on its business substantially as now conducted, or in any material liability on the part of the Seller or which would draw into question the validity of this Agreement or the Related Conduit Agreements or the Mortgage Loans or of any action taken or to be taken in connection with the obligations of the Seller contemplated herein, or which would be likely to impair the ability of the Seller to perform under the terms of this Agreement or the Related Conduit Agreements; (iv) The Seller is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which the Seller is a party or which purports to be binding upon the Seller or any of the Seller's assets, or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default would be likely to impair the ability of the Seller to perform under the terms of this Agreement or the Related Conduit Agreements; (v) The transfer, assignment and conveyance of the Mortgage Loans by the Seller pursuant to this Agreement are not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction; (vi) All information supplied by the Seller to the Buyer, the Master Servicer or the Trustee is true and correct in all material respects, and does not omit to state a material fact necessary to make the statements set forth in such information not misleading; (vii) The Seller has tangible net worth (defined as total shareholders equity less goodwill) as determined in accordance with generally accepted accounting principles of at least $____ million; (viii) The Seller will receive fair consideration and reasonably equivalent value in exchange for the sale of the related Mortgage Loans; (ix) The Seller is solvent, and the Seller will not be rendered insolvent as a result of the sale of any Pool of Mortgage Loans to the Buyer; the Seller will not sell any interest in any Mortgage Loan with any intent to hinder, delay or defraud any of its respective creditors; and (x) The origination practices used and to be used by the Seller with respect to the Mortgage Loans have been, and will be, in all material respects, legal, proper and customary in the mortgage loan lending and servicing business and consistent with the Related Conduit Agreements and the Seller's Applicable Guidelines as amended by the Pool Parameters attached hereto as Exhibit D. The representations and warranties set forth in this paragraph (a) shall survive the sale and assignment of the Mortgage Loans by the Seller hereunder. Upon discovery of a material breach of any of the foregoing representations and warranties, the Buyer or the Master Servicer shall give prompt written notice to the Seller. Within ____ days of the earlier of its discovery or its receipt of notice of breach, the Seller shall cure such breach to the satisfaction of the Buyer. (b) The Buyer hereby represents and warrants to the Seller and the Master Servicer that, as of the date hereof: 17 18 (i) The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; the Buyer has the power and authority to execute and deliver this Agreement and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement (including any Conveyance Agreement executed by the Buyer on behalf of the Conduit Acquisition Trust and any other instruments of transfer to be delivered pursuant to this Agreement) by the Buyer and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of the Buyer, contravene or violate any law or regulation applicable to the Buyer or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of the Buyer pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which the Buyer is a party or which purports to be binding upon Buyer or any of Buyer's assets; this Agreement evidences the valid and binding obligation of the Buyer enforceable against the Buyer in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (ii) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the Buyer of this Agreement or the Related Conduit Agreement, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement on the part of the Buyer and the performance by the Buyer of its obligations under this Agreement; (iii) There is no action, suit, proceeding or investigation pending or, to the best of the Buyer's knowledge, threatened against the Buyer which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of the Buyer or in any material impairment of the right or ability of the Buyer to carry on its business substantially as now conducted, or in any material liability on the part of the Buyer or which would draw into question the validity of this Agreement or of any action taken or to be taken in connection with the obligations of the Buyer contemplated herein, or which would be likely to impair the ability of the Buyer to perform under the terms of this Agreement; and (iv) The Buyer is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which the Buyer is a party or which purports to be binding upon Buyer or any of Buyer's assets, or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Buyer or its properties or might have consequences that would adversely affect its performance hereunder. 18 19 The representations and warranties set forth in this paragraph (b) shall survive the sale and assignment of the Mortgage Loans by the Seller hereunder. Upon discovery of a breach of any of the foregoing representations and warranties which materially and adversely affects the interests of the Seller, the Seller shall give prompt written notice to the Buyer. Within ____ days of its discovery or its receipt of notice of breach, the Buyer shall cure such breach in all material respects. (c) The Master Servicer hereby represents and warrants to the Buyer and the Seller that, as of the date hereof: (i) The Master Servicer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all licenses and qualifications necessary to carry on its business as now being conducted and to perform its obligations hereunder; the Master Servicer has the power and authority to execute and deliver this Agreement and to perform its obligations in accordance herewith; the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of the Master Servicer, contravene or violate any law or regulation applicable to the Master Servicer or contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of the Master Servicer pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which the Master Servicer is a party or which purports to be binding upon Master Servicer or any of Master Servicer's assets; this Agreement evidences the valid and binding obligation of the Master Servicer enforceable against the Master Servicer in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (ii) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution and delivery by the Master Servicer of this Agreement, have been duly taken, given or obtained, as the case may be, are in full force and effect, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement on the part of the Master Servicer and the performance by the Master Servicer of its obligations under this Agreement; (iii) There is no action, suit, proceeding or investigation pending or, to the best of the Master Servicer's knowledge, threatened against the Master Servicer which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of the Master Servicer or in any material impairment of the right or ability of the Master Servicer to carry on its business substantially as now conducted, or in any material liability on the part of the Master Servicer or which would draw into question the validity of this Agreement or of any action taken or to be taken in connection with the obligations of the Master Servicer contemplated herein, or which would be likely to 19 20 impair the ability of the Master Servicer to perform under the terms of this Agreement; and (iv) The Master Servicer is not in default with respect to any mortgage, indenture, contract, agreement or other undertaking to which the Master Servicer is a party or which purports to be binding upon Master Servicer or any of Master Servicer's assets, or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Master Servicer or its properties or might have consequences that would adversely affect its performance hereunder. The representations and warranties set forth in this paragraph (c) shall survive the sale and assignment of the Mortgage Loans by the Seller hereunder. Upon discovery of a breach of any of the foregoing representations and warranties which materially and adversely affects the interests of the Seller, the Seller shall give prompt written notice to the Master Servicer. Within ____ days of its discovery or its receipt of notice of breach, the Master Servicer shall cure such breach in all material respects. Section 8. Representations and Warranties of the Seller Regarding the Mortgage Loans. (a) Set forth in Exhibit E hereto is a listing of representations and warranties which will be deemed to have been made by the Seller to the Buyer, the Master Servicer and the Trustee in connection with each purchase of a Pool with respect to the Mortgage Loans in such Pool. In addition, the Buyer may, pursuant to a Conveyance Agreement with respect to the Mortgage Loans in the related Pool, delete or modify any of such representations and warranties, or may add additional representations and warranties ("Additional Representations and Warranties") if (i) Seller's Applicable Guidelines were to materially change or (ii) if any other party to an Advanta securitization were to require the addition or deletion of Additional Representations and Warranties; provided, that if the Seller determines that a significant number of its mortgage loans would not satisfy such Additional Representations and Warranties, the Seller shall have the right, but not the obligation, to terminate its obligation to offer any additional loans hereunder without further obligation to the Buyer except that all of the Seller's duties and obligations hereunder with respect to Mortgage Loans that were previously sold hereunder shall remain in full force and nothing in this provision shall be construed as terminating any of the Buyer's rights with respect to all previously sold Mortgage Loans. The representations and warranties listed in Exhibit E hereto, together with any Additional Representations and Warranties, are the "Representations and Warranties". It is understood and agreed that the Representations and Warranties shall survive the sale and assignment of the Mortgage Loans to the Conduit Acquisition Trust and by the Conduit Acquisition Trust to an Advanta Trust. Upon discovery by the Seller, the Master Servicer or the Buyer of a breach of any of the Representations and Warranties (without regard to any limitation set forth in such Representation or Warranty concerning the knowledge of the Seller as to the facts stated therein so long as the Seller is required to repurchase the related Mortgage Loan or Mortgage Loans pursuant to the related Advanta Pooling Agreement without regard to any similar limitation), which breach, in the reasonable opinion of the Buyer, materially and adversely affects the value, collectibility or marketability of the related Mortgage Loan or Mortgage Loans, the party discovering such breach shall give prompt written notice to the other party and the Seller shall be required to take the remedial actions required by Section 8(b) hereof within the time periods required pursuant thereto. (b) Within ____ days of the earlier of its discovery or its receipt of notice of breach, the Seller shall use all reasonable efforts to cure such breach to the reasonable 20 21 satisfaction of the Buyer. Unless, prior to the expiration of such ____ day period, such breach has been cured or otherwise does not exist or continue to exist, the Seller shall repurchase such Mortgage Loan (including any property acquired in respect thereof and any insurance policy or insurance proceeds with respect thereto) in the same manner and subject to the same conditions as set forth in Section 6 hereof. Upon making any such repurchase, the Seller shall be entitled to receive an instrument of assignment or transfer from the Trustee, without recourse to the Buyer or the Trustee, to the same extent as set forth in Section 6 hereof with respect to the repurchase of Defective Mortgage Loans under that Section. (c) In the event that the Seller fails, within the time periods specified in this Agreement, to cure any material breach of a Representation and Warranty, the Buyer shall have the right thereafter to receive any Residual Cashflow otherwise payable to the Seller, but not in excess of any actual loss suffered by the Buyer. The Buyer shall make a good faith effort to collect any amounts due by the Obligor in order to mitigate any actual loss that may be suffered by the Buyer; provided, that, if the Buyer adheres to its servicing guidelines, this shall be considered conclusive evidence of good faith. (d) The remedies described in paragraphs (c) and (d) above, together with all other remedies the Buyer may have at law or in equity, shall survive any resignation or termination of Advanta Mortgage Corp. USA as Master Servicer. (e) Additional Representatives and Warranties to be added to this Agreement shall only be added upon the mutual agreement of the Buyer and the Seller or if required by a credit enhancer, any rating agencies, or any underwriter. Section 9. Application of Residual Cashflow. (a) On each Distribution Date, all available Excess Interest with respect to the Accumulation Pool shall be applied as a Reserve Deposit or to the amount payable by the Seller described in the last paragraph in Section 4(a) hereof. (b) At the time any Pools are transferred from the Accumulation Pool to an Advanta Trust (thereby becoming all or part of a Securitized Loan Pool) the Reserve Amount then relating to such Pool shall be credited against the initial Reserve Amount for the related Securitized Loan Pool. If the initial Reserve Amount exceeds the initial Reserve Requirement applicable to such Securitized Loan Pool (i.e., the amount of any "initial deposit" at securitization) the amount of such excess shall be paid by the Buyer to the Seller. Conversely, if the initial Reserve Requirement for such Securitized Loan Pool exceeds the actual Reserve Amount for the related Pools the amount of such shortfall shall be paid by the Seller to the Buyer as an Additional Initial Reserve Amount for such Securitized Loan Pool. (c) On the closing date of the related Advanta Securitization, the Buyer shall pay to the Seller the Initial Premium Payment. (d) On each Distribution Date the Residual Cashflow with respect to any individual Securitized Loan Pool shall first be applied, to the extent of the related Initial Premium Amortization Current Amount, as a reduction in the related Unamortized Initial Premium Amount. On each Distribution Date, the Master Servicer will, on behalf of the Buyer, distribute to the Seller the Deferred Premium Payment if any, then due. Notwithstanding the foregoing, the Master Servicer shall be entitled to withhold from any distribution of a Deferred Premium Payment with respect to any individual Securitized Loan Pool, and pay over to the Buyer, the following amounts: 21 22 (x) any amounts described in the second paragraph of Section 4(a) hereof, together with any Compensating Interest paid out by the Servicer; (y) the amount, if any, by which (i) the aggregate cumulative amount of Realized Losses with respect to any other Securitized Loan Pool exceeds (ii) the aggregate, cumulative amount of Reserve Deposits with respect to such other Securitized Loan Pool; and (z) the amount of any Unamortized Initial Premium Amount with respect to any other Securitized Loan Pool which remains outstanding after ____ months. (e) The Buyer's obligation to pay the Deferred Premium Payments to the Seller will be a secured corporate obligation of the Buyer, as set forth in the Tri-Party Security Agreement, and will not represent any direct ownership interest in any Mortgage Loans. (f) The Master Servicer shall furnish the statements described in Section 10 hereto to the Seller, by facsimile on each Distribution Date; such statements shall, inter alia, contain information relating to the Residual Cashflow for such Distribution Date. The Buyer and the Master Servicer shall permit the inspection, on reasonable notice, by the Seller or the Seller's designees of all of the Buyer's and the Master Servicer's books and records relating to the Mortgage Loans and the Residual Cashflows. All calculations made by the Buyer or the Master Servicer shall be conclusive in the absence of manifest error. Section 10. Distribution Date Statement. (a) The Master Servicer shall, not later than each Distribution Date, furnish in writing to the Seller and the Buyer a statement setting forth the following information with respect to the Accumulation Pool and each Securitized Loan Pool: (i) the total amount of payments in respect of or allocable to interest on the Mortgage Loans received or deemed to have been received from the related Mortgagors by the Master Servicer during the prior calendar month (including any net income from REO Properties received during the prior calendar month); (ii) the aggregate of all Principal Payments and Principal Prepayments received or deemed to have been received from the related Mortgagors by the Master Servicer during the prior calendar month; (iii) the total amount of recoveries of delinquent principal and interest payments received during the prior calendar month; (iv) the total amount of prepayment penalties received during the prior calendar month; (v) the aggregate of any Net Insurance Proceeds received by the Master Servicer during the prior calendar month; (vi) the aggregate of any Net Liquidation Proceeds received by the Master Servicer during the prior calendar month; 22 23 (vii) the total amount of Compensating Interest payments to be paid by the Master Servicer for such Distribution Date; (viii) the aggregate Repurchase Prices for any Mortgage Loans which the Seller is required to repurchase on or prior to such Distribution Date pursuant to Sections 5(b), 5(c), 6(b) or 8(c) hereof; (ix) the aggregate amount of Advances made by the Master Servicer during or with respect to the prior calendar month; (x) the related monthly Servicing Fee; (xi) the aggregate amount of Advances reimbursable to the Master Servicer for such Distribution Date and not previously reimbursed; (xii) the weighted average Mortgage Loan Rate as of the last day of the prior calendar month (separately for ARMs and Fixed Rate Loans); (xiii) the related Reserve Amount and Reserve Requirement and Residual Cashflow as of such Distribution Date; (xiv) the book value of any REO Properties as of the last day of the prior calendar month; and (xv) the Residual Cashflow, the Deferred Premium Payment, the Initial Premium Fee, the Initial Premium Amortization Current Amount, the Carry-Forward Amount, the Initial Premium Amortization Current Amounts and the Unamortized Initial Premium Amounts. (b) In addition, on each Payment Date the Master Servicer will furnish by telecopy to the Buyer and the Seller, the following information with respect to the Mortgage Loans in the Accumulation Pool and each Securitized Loan Pool as of the last day of the related prior calendar month: (i) the total number of Mortgage Loans and the aggregate Principal Balances thereof, together with the number, aggregate principal balances of such Mortgage Loans and the percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans (a) 30-59 delinquent, (b) 60-89 days delinquent and (c) 90 or more days delinquent; (ii) the number, aggregate Principal Balances of all Mortgage Loans and percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans in foreclosure proceedings (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)); (iii) the number, aggregate Principal Balances of all Mortgage Loans and percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans relating to Mortgagors in bankruptcy proceedings (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)); and 23 24 (iv) the number, aggregate Principal Balances of all Mortgage Loans and percentage of the aggregate Principal Balances of such Mortgage Loans to the aggregate Principal Balance of all Mortgage Loans relating to REO Properties (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)). (v) any other information with respect to the Mortgage Loans in each Accumulation Pool and each Securitized Loan Pool as reasonably requested by the Seller. Section 11. Merger or Consolidation of the Seller. Any corporation or other entity (i) into which the Seller may be merged or consolidated, (ii) which may result from any merger, conversion or consolidation to which the Seller shall be a party, or (iii) which may succeed to all or substantially all of the business of the Seller, which corporation or other entity shall, in any case where an assumption shall not be effected by operation of law, execute an agreement of assumption to perform every obligation of the Seller under this Agreement, shall be the successor to the Seller hereunder without the execution or filing of any document or any further act by any of the parties to this Agreement, except that if the Seller in any of the foregoing cases is not the surviving entity, then the surviving entity shall execute and deliver to the Buyer, the Master Servicer and to the Trustee an agreement of assumption to perform every obligation of the Seller hereunder. Section 12. Servicing. (a) The Master Servicer agrees to service, all Mortgage Loans sold by the Seller to the Buyer and all Mortgage Loans entered into the Master Servicer's servicing system, by the Master Servicer but not yet purchased by the Buyer, in each case in accordance with all applicable laws and customary and usual standards of practice of prudent institutional residential mortgage loan servicers of comparable Mortgage Loans, and with a view to the maximization of timely recovery of principal and interest on the Mortgage Loans, but without regard to: (i) any relationship that Master Servicer or any of its affiliates may have with any Borrower or affiliates or manager thereof, (ii) the Master Servicer's obligations to make advances or to incur servicing expenses with respect to the Mortgage Loans, or (iii) the Master Servicer's right to receive compensation for its services hereunder. Such servicing standards and requirements shall, subject to the requirements of paragraph (d) below, include (i) the making of Advances, (ii) the advancing of Compensating Interest to be reimbursed by the Residual Cashflows due to the Seller and (iii) the disposition of REO Properties within ____ months of the taking of title. (b) Subject to the provisions of this Section 12, Master Servicer shall have full power and authority to do and cause to be done any and all things in connection with the servicing and administration of the Mortgage Loans which the Master Servicer may deem necessary or desirable. The Seller will provide the Master Servicer, upon request, with any powers of attorney necessary or appropriate to enable the Master Servicer to carry out its servicing and administrative duties under this Agreement. (c) The Master Servicer shall and is hereby authorized and empowered by the Seller to (i) execute and deliver, on behalf of the Seller, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge and all other comparable instruments, with respect to the mortgage Loans and with respect to the Mortgaged Properties, (ii) consent to any modification of the terms of the Note if the effect of any such modification will not materially or adversely affect the security afforded by the related Mortgaged Property and such modification does not reduce the accrued interest or the interest rate payable by a 24 25 Borrower without Seller's prior written consent, (iii) institute foreclosure proceedings or obtain a deed-in-lieu of foreclosure on behalf of the Seller, and (iv) take title in the name of the Seller to any Mortgaged Property upon such foreclosure or delivery of deed in lieu of foreclosure. (d) Notwithstanding the other provisions hereof, if a Mortgage Loan has been entered into the Master Servicer's servicing system by the Master Servicer but not yet purchased by the Buyer: (i) the servicing of the Mortgage Loans shall be on an "actual/actual" basis, with monthly interest calculations for periods of a full month based on a 30-day month and a 360 day year, unless a different method is required by the terms of the related Mortgage Loan or by the requirements of applicable law; interest calculations for periods of less than a full month will be calculated on the basis of the actual number of days elapsed and a 365 day year, unless a different method is required by the terms of the related Mortgage Loan or by the requirements of applicable law. (ii) From time to time as appropriate in the servicing of any Mortgage Loan, including without limitation, the payment in full of any Mortgage Loan, notification that payment in full will be escrowed, foreclosures or other comparable conversion of a mortgage or collection under any applicable insurance policy, the Seller, upon request of the Master Servicer, shall release or cause the release and delivery of the related Mortgage Loan Documents to the Master Servicer, if the Mortgage Loan Documents have not previously been delivered by the Seller to the Buyer. (iii) The Master Servicer shall promptly notify the Seller if a claim is made by a third party with respect to any Mortgage Loans which have been entered into the Master Servicer's servicing system but not previously purchased by the Buyer, and the Master Servicer at its option may assume the defense of any such claim. The Seller shall, within ten (10) business days of receiving a statement of amounts advanced by the Master Servicer in connection with the defense of any such claim, reimburse the Master Servicer for all amounts advanced by it pursuant to this Section 12, except to the extent that such claim is the result of the Master Servicer's failure to service the Mortgage Loans in compliance with the terms of this Agreement. Seller shall have no obligation to reimburse the Master Servicer for claims made with respect to any Mortgage Loans previously purchased by Buyer. (e) With respect to all Mortgage Loans sold by the Seller to the Buyer and all Mortgage Loans entered into the Master Servicer's servicing system by the Master Servicer but not yet purchased by the Buyer, not later than the twenty-fifth (25th) day of each calendar month, or the succeeding business day if the twenty-fifth (25th) is not a business day, the Master Servicer shall prepare and deliver the following reports with respect to activity for the most recently ended prior calendar month: (a) a trial balance report including all Mortgage Loans; (b) a monthly remittance report; (c) a report setting forth any Mortgage Loans added or deleted; (d) a report setting forth curtailment or prepayments; and (e) reports setting forth delinquency detail (including bankruptcy, foreclosure, and REO status. 25 26 The Master Servicer shall also deliver, from time to time, such other information as the Seller shall reasonably request. (f) Master Servicer, shall, at its own expense, maintain at all times, policies of fidelity, theft, forgery and errors and omissions insurance. Such policies shall be responsible amounts with acceptable standard coverages in accordance with prudent mortgage industry standards. (g) The Servicing Expenses shall be as follows: (i) in the event no "lifetime" tax contracts are presently in force which are assignable to Master Servicer, Seller agrees to reimburse the Master Servicer for the cost of purchasing a tax contract for each Mortgage Loan in this category. (ii) Seller agrees to reimburse the Master Servicer and/or the Buyer for any recordation fees the Master Servicer and/or the Buyer incurs pursuant to this Agreement and the Related Conduit Agreements upon purchase of the Mortgage Loans from the Seller. (h) The Master Servicer hereby represents and warrants to, and covenants with the Seller that the Master Servicer will service the Mortgage Loans without distinction as to the identity of the Seller as the residual, first-loss holder of the Mortgage Loans, and on the same terms by which the Master Servicer services mortgage loans for which it or its affiliates are the residual, first-loss holder. (i) The Master Servicer may retain sub-servicers to perform all or a part of its servicing duties hereunder, with the prior written consent of the Seller (which consent shall not be unreasonably withheld), except that no retention of any sub-servicer shall release the Master Servicer from any liability to the Seller. (j) The Seller shall indemnify and hold the Master Servicer and each of their officers, directors, employees and agents, harmless from and shall reimburse the Master Servicer for any losses, damages, deficiencies, claims, penalties, forfeitures, causes of action or expenses of any nature (including reasonable attorneys' fees) incurred by Master Servicer which arise out of or result from: (i) the inaccuracy of any representation of the Seller contained in this Agreement or material breach of any warranty, covenant or agreement made or to be performed by the Seller pursuant to this Agreement; (ii) the failure of the originator of any Mortgage Loan to originate such Mortgage Loan in accordance with applicable law; (iii) the failure of any prior servicer to service the Mortgage Loan in accordance with applicable law and any agreement under which it may have serviced such Mortgage Loan; (iv) any matters that occurred prior to the transfer date for the servicing of the Mortgage Loan involved or any incomplete or incorrect Mortgage Loan data, records, or information provided in connection with the origination or prior servicing of any Mortgage Loans; 26 27 (v) the Seller's failure to fulfill any servicing responsibilities not assumed by Master Servicer or otherwise resulting from the Seller's preventing, hampering or impeding Master Servicer's performance of its duties and responsibilities under this Agreement; or (vi) any litigation or claim with respect to the Mortgage Loans arising out of, or resulting from, the Seller's failure to observe the terms and covenants of the Mortgage Loans or this Agreement, including specifically any litigation relating to adjustable rate mortgage loans. (k) The Master Servicer shall indemnify, hold the Seller harmless from, and shall reimburse the Seller for any losses, damages, deficiencies, claims, penalties, forfeitures, causes of actions or expenses of any nature (including reasonable attorneys' fees) incurred by the Seller which arise out of or result from (i) the inaccuracy of any material representation of the Master Servicer contained in this Agreement or material breach of any warranty, covenant or agreement made or to be performed by the Master Servicer's pursuant to this Agreement; and (ii) the failure of the Master Servicer to service any Mortgage Loan in accordance with the applicable law or applicable agency guidelines, if any, or in compliance with the terms and provisions of such Mortgage Loans or of this Agreement. (l) At any reasonable time, and from time to time upon reasonable notice, the Seller, or any agents or representatives thereof may inspect the Master Servicer's operations and discuss the servicing operations of the Master Servicer with any of its officers or directors. The costs and expenses incurred by the Master Servicer or its agents or representatives in connection with any such examinations or discussions shall be paid by the Seller. Section 13. Authorized Representatives. The names of the officers of the Seller, the Master Servicer and of the Buyer who are authorized to give and receive notices, requests and instructions and to deliver certificates and documents in connection with this Agreement on behalf of the Seller, the Master Servicer and of the Buyer ("Authorized Representatives") are set forth on Exhibit C, along with the specimen signature of each such officer. From time to time, the Seller, the Master Servicer or the Buyer may, by delivering to the others a revised exhibit, change the information previously given. Section 14. Notices. All demands, notices and communications relating to this Agreement shall be in writing and shall be deemed to have been duly given when received by the other party or parties at the address shown below, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee. If to the Seller: PacificAmerica Money Center, Inc. 21031 Ventura Blvd. Woodland Hills, CA 91364-2210 Attention: Charles J. Siegel Telecopy: 818-340-6303 27 28 with a copy to: Catherine DeBono Holmes, Esq. Jeffer, Mangles, Butler & Marmaro LLP 2121 Avenue of the Stars, 10th Floor Los Angeles, CA 90067 Telecopy: 310-203-0567 If to the Buyer: Advanta Mortgage Conduit Services, Inc. 500 Office Center Drive, Suite 400 Fort Washington, Pennsylvania 19034 Attention: Mark Casale Telecopy: 215-444-4743 If to the Master Servicer: Advanta Mortgage Corp. USA 16875 West Bernardo Drive San Diego, California 92127 Attention: Loan Servicing Telecopy: (619) 674-3880 Section 15. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to conflict of laws rules applied in the State of California. Section 16. Assignment. No party to this Agreement may assign its rights or delegate its obligations under this Agreement without the express written consent of the other parties, except as otherwise set forth in this Agreement. Section 17. Counterparts. For the purpose of facilitating the execution of this Agreement and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original, and together shall constitute and be one and the same instrument. Section 18. Amendment. This Agreement may be amended from time to time by the Seller, the Buyer and the Master Servicer only by a written instrument executed by such parties. Section 19. Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. Section 20. No Agency; No Partnership or Joint Venture. None of the Seller, the Master Servicer nor the Buyer is the agent or representative of one or both of the others, and nothing in this Agreement shall be construed to make any of the Seller, the Master Servicer or the Buyer liable to any third party for services performed by it or for debts or claims accruing to it against the other party. Nothing contained herein nor the acts of the 28 29 parties hereto shall be construed to create a partnership or joint venture between the Buyer, the Master Servicer and the Seller. Section 21. Arbitration. Any dispute or disagreement under this Agreement shall be rendered by submitting such dispute or disagreement to an independent, mutually agreed upon arbitrator. The arbitrator shall conduct the arbitration in accordance with the Rules of the American Arbitration Association. If the parties are unable to select an arbitrator, the arbitrator shall be selected in accordance with the procedures of the American Arbitration Association. The decision of the arbitrator shall be final and binding upon the parties and non-appealable. Any decision and award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration pursuant to this Agreement shall be conducted in California. Section 22. Confidentiality. No party hereto shall disclose to third parties, without the prior consent (which shall not be unreasonably withheld) of the other parties, in writing, the existence of or the terms of this Agreement, except to its accountants and attorneys or as required by law. Section 23. Further Assurances. The parties hereto agree to cooperate reasonably and in good faith with one another in the performance of this Agreement. Section 24. Legal Costs. The parties hereto agree that in the event of arbitration or litigation between them, the non- prevailing party shall reimburse the prevailing party for all legal fees and expenses of counsel incurred by the prevailing party. The prevailing party shall be the party in whose favor a final decision or judgment is entered, after the conclusion of any appeals or after the time during which an appeal may be taken shall have run. Payment of sums owning under this Section 24 shall be made within ten (10) days following the date that the right to receive payment shall be final. Section 25. Term. The buy-sell provisions of this Agreement shall terminate on the Commitment Termination Date, as defined in the Master Commitment; the other obligations of the parties set forth herein shall continue in full force and effect until the payment in full (or other liquidation) of the last Mortgage Loan. 29 30 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers, all as of the day and year first above written. PACIFICAMERICA MONEY CENTER, INC. as Seller By:_______________________________ Name: Title: ADVANTA MORTGAGE CONDUIT SERVICES, INC., as Buyer By:_______________________________ Name: Title: ADVANTA MORTGAGE CORP. USA, as Master Servicer By:_______________________________ Name: Title: 30 31 FORM OF CONVEYANCE AGREEMENT PacificAmerica Money Center, Inc., as seller (the "Seller") and Advanta Mortgage Conduit Services, Inc. (the "Buyer") on behalf of Conduit Acquisition Trust, (the "Purchaser"), pursuant to the Amended and Restated Corporate Finance Agreement amended as of January 27, 1997 among the Seller, the Buyer and Advanta Mortgage Corp. USA (the "Corporate Finance Agreement"), hereby confirm their understanding with respect to the sale by the Seller and the purchase by the Buyer on behalf of the Conduit Acquisition Trust of those Mortgage Loans listed on the attached Mortgage Loan Schedule (the "Purchased Mortgage Loans"). Conveyance of Purchased Mortgage Loans. The Seller, concurrently with the execution and delivery of this Conveyance Agreement, does hereby irrevocably transfer, assign, set over and otherwise convey to the Buyer, without recourse (except as otherwise explicitly provided for herein) all of its right, title and interest in and to the Purchased Mortgage Loans, including specifically, without limitation, the Mortgages, the Mortgage Files and all other documents, materials and properties appurtenant thereto and the Mortgage Notes, including all interest accruing thereon and principal received on or with respect to such Purchased Mortgage Loans on or after the related Mortgagor's Cut-Off Date and all interest accruing thereon since the related Mortgagor's most recent paid-to date (or date of origination if no payment is yet due), together with all of its right title and interest in and to the proceeds received on or after the related Cut-Off Date of any related insurance policies on behalf of the Buyer. If the Seller cannot deliver the original Mortgage or mortgage assignment with evidence of recording thereon concurrently with the execution and delivery of this Conveyance Agreement solely because of a delay caused by the public recording office where such original Mortgage or mortgage assignment has been delivered for recordation, the Seller shall promptly deliver to the Buyer's designee on behalf of the Buyer such original Mortgage or mortgage assignment with evidence of recording indicated thereon upon receipt thereof from the public recording official, with a copy thereof delivered to the Master Servicer. The costs relating to the delivery of the documents specified in this Conveyance Agreement shall be borne by the Seller. The Seller hereby additionally certifies to the Buyer and the Master Servicer: (i) The representations and warranties of the Seller contained in the Corporate Finance Agreement and all related agreements, as of the date hereof, are true and correct, and the Seller has complied in all material respects with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the date hereof in connection with the sale of the Purchased Mortgage Loans. (ii) There are no actions, suits or proceedings pending or threatened against or affecting the Seller which if adversely determined, individually or in the aggregate, would be reasonably likely to adversely affect in any material way the Seller's obligations under any agreement to which the Seller is a party. No merger, liquidation, dissolution or bankruptcy of the Seller is pending or contemplated. A-1 32 (iii) No material adverse change in the condition, financial or otherwise, or properties of the Seller has occurred since the date of the Corporate Finance Agreement. All terms and conditions of the Corporate Finance Agreement are hereby incorporated herein; provided, that in the event of any conflict the provisions of this Conveyance Agreement shall control over the conflicting provisions of the Corporate Finance Agreement. Terms capitalized herein and not defined herein shall have their respective meanings as set forth in the Corporate Finance Agreement. A-2 33 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers, all as of the _____ day of _______________. PACIFICAMERICA MONEY CENTER, INC. as Seller By:____________________________ Title:_________________________ ADVANTA MORTGAGE CONDUIT SERVICES, INC. as sponsor on behalf of CONDUIT ACQUISITION TRUST, as Buyer By:_____________________________ Title:__________________________ Attachments A. Schedule of Purchased Mortgage Loans. B. Trustee's initial exception report. C. Seller's officer's certificate. D. Closing Statement and Recap Summary. A-3 34 Closing Statement and Funding Recap Summary PacificAmerica Money Center, Inc. Pool: ____ Date Prepared: Sale Cut-Off Date: (Close of Business) Sale Funding Date: Pricing Date: Buyer: Advanta Mortgage Conduit Services, Inc. on behalf of Conduit Acquisition Trust Seller: PacificAmerica Money Center, Inc. Originator: _________________ Servicer: Advanta Mortgage Corp. USA Scheduled Servicing Transfer Date: Broker Number: Fixed Pool Identification Number: ARM Pool Identification Number: Investor Number: Number of Loans: Fixed Pool Balance: ARM Pool Balance: Total Pool Balance: Total Pool Balance Accrued interest from Cut-Off Date to Closing Initial Applicable Rate ___% Recordation Fees: Net Due Seller/Funding Transfer Amt. A-4 35 EXHIBIT B CONTENTS OF MORTGAGE FILE 1. Collateral File (a) the original Note endorsed by PacificAmerica Money Center, Inc. ("PAM") as follows: For value received, pay to the order of "Bankers Trust Company of California, N.A. as Custodian or Trustee", without recourse with all intervening endorsements showing a complete chain of title from the original lender to PAM; (b) the original Mortgage or Deed of Trust, with evidence of recording thereon, or, until the original Mortgage or Deed of Trust has been received from the applicable public recording office, a copy of the Mortgage or Deed of Trust certified by PAM to be a true and complete copy of the original Mortgage or Deed of Trust submitted for recording; (c) the Note riders signed as required; (d) a copy of the original unrecorded assignment of the Mortgage or Deed of Trust from PAM to "Bankers Trust Company of California, N.A. as Custodian or Trustee"; (e) documentation of all intervening mortgage assignments with evidence of recording thereon, sufficient to show a complete chain of assignment from the originator of the Mortgage Loan to PAM; (f) any and all assumption, modification, written assurance or substitution agreements, where the terms or provisions of a Mortgage or Note have been modified or such Mortgage or Note have been assumed; (g) the title insurance policy and preliminary policy, including all endorsements and/or riders, or until an original policy is received, a binding commitment to issue such a policy, which contains a legal description of the Mortgaged Property and which has been signed on the origination date by an authorized agent of the title insurer; 2. Servicing File (using the Advanta Stacking Order as of July 1, 1995) (a) any primary credit insurance policy or certificate of insurance; (b) all required hazard and flood insurance policies with respect to the Mortgage Property; (c) the tax service contract, where applicable; (d) any Private Mortgage Insurance Certificate; (e) any guaranty(s), surety agreement(s), and/or survey(s); (f) any appraisals on the Mortgaged Property; (g) the completed loan application signed by the Mortgagor; (h) the signed mortgage loan settlement sheet; B-1 36 (i) all employment, deposit and mortgage verifications, credit reports and reports and any other document relied upon in making the Mortgage Loan; (j) any Truth-In-Lending RESPA and ECOA related documents required by law; (k) all records, ledger cards and other documents relating to the Mortgage Loan; (l) LIW Loan information worksheet; (m) Copies of all applicable transfer notifications i.e. borrower insurance, flood, hazard, PMI (n) the original unrecorded assignment of the Mortgage or Deed of Trust from the Buyer to Bankers Trust Company of California, N.A, as Custodian or Trustee. B-2 37 EXHIBIT C AUTHORIZED REPRESENTATIVES Reference is hereby made to the Amended and Restated Corporate Finance Agreement, amended as of January 27, 1997 (the "Agreement"), among PacificAmerica Money Center, Inc. as seller ("PAM"), Advanta Mortgage Conduit Services, Inc. as Buyer (the "Buyer"), and Advanta Mortgage Corp. USA, as master servicer (the "Master Servicer"): The following are PAM's Authorized Representatives for purposes of the Agreement: Name Title Specimen Signature - ---- ----- ------------------ The following are the Buyer's Authorized Representatives for purposes of the Agreement: Name Title Specimen Signature - ---- ----- ------------------ The following are the Master Servicer's Authorized Representatives for purposes of the Agreement: Name Title Specimen Signature - ---- ----- ------------------ William P. Garland C-1 38 EXHIBIT D Applicable Pool Parameters (a) Each Mortgage Loan is secured by a closed-end mortgage, in first or second lien position, to A to D credit borrowers (as defined by Advanta Mortgage Conduit Services, Inc. in a manner no less favorable than the grading criteria used by the Buyer for its own loan originations), on single family 1-4 unit properties; (b) No less than ____ of any Pool will have been originated with A and B credit grades; (c) No ARM Pool will be more than ____ under the fully indexed rate teased at origination calculated on a weighted average basis; (d) Each ARM is in a first lien position; (e) Each ARM's interest rate will be tied to either _________________; (f) Each ARM will have a ____ or ____ periodic (every six months) and ____ or ____ lifetime cap; (g) No more than ____ of any Pool will consist of ____ year fixed/____ year adjustable ____, ____ or ____ intermediate mortgages (Treasury based index); and (h) No Mortgage Loan is a simple interest loan. (i) No more than ____ of any Pool will consist of loans with CLTVs in excess of ____ (without mortgage insurance from a carrier acceptable to the Master Servicer). (j) No less than ____ of each Pool will have been originated under a full documentation program. (k) No loan is more than ____ days contractually delinquent as of the securitization cut-off date. (l) No more than ____ of any ____ Loans will have CLTVs in excess of ____. D-1 39 EXHIBIT E REPRESENTATION AND WARRANTIES (i) The information with respect to each Mortgage Loan set forth in the related Mortgage Loan Schedule is true and correct as of the Cut-Off Date. (ii) All of the original or certified documentation required to be delivered to the Buyer, the Master Servicer or the Buyer's designee pursuant to the documentation requirements, as set forth on the attached Exhibit B, with respect to each Mortgage Loan has been or will be delivered to the Buyer, the Master Servicer or the Buyer's designee, as required thereby. Each Mortgage Loan is documented on a note and mortgage form, with appropriate riders approved by the Buyer. (iii) Each Mortgage is a valid and existing first or second lien of record on the Mortgaged Property, (subject in the case of any Second Mortgage Loan only to a Senior Lien on such Mortgaged Property) and subject in all cases to the exceptions to title set forth in the title insurance policy, if any, with respect to the related Mortgage Loan, which exceptions are generally acceptable to banking institutions in connection with their regular mortgage lending activities, and such other exceptions to which similar properties are commonly subject and which do not materially and adversely affect the benefits of the security intended to be provided by such Mortgage. (iv) Immediately prior to the transfer and assignment herein contemplated, PAM held good, marketable, and indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by PAM subject to no liens, charges, mortgages, encumbrances or rights of others except as set forth in clause (iii) or other liens which will be released simultaneously with such transfer and assignment and upon receipt of each Mortgage Loan, the Buyer will hold good, marketable, and indefeasible title to, and will be the sole owner of each Mortgage Loan, free and clear of any liens, charges, mortgages, encumbrances, or rights of others except as set forth in paragraph (iii) or any liens created by the Buyer. (v) As of the related Cut-Off Date, no Mortgage Loan is thirty (30) or more days contractually delinquent, and no Mortgage Loan has been thirty (30) or more days contractually delinquent more than once during the twelve (12) months preceding the related Cut-Off Date, except for those loans the Buyer reviews during due diligence and agrees to purchase with knowledge of delinquency; there is no valid and enforceable offset, defense or counterclaim to any Note or Mortgage, including the obligation of the related Mortgagor to pay the unpaid principal of or interest on such Note. Except for any such delinquencies, there is no material default, breach, violation or event of acceleration existing under any Mortgage or the related Note and no event which, with the passage of time or with notice and the expiration of any cure period, would constitute a material default, breach, violation or event of acceleration; PAM has not waived any default, breach, violation or event of acceleration. (vi) There is no delinquent tax or assessment lien or mechanic's lien, or claim for work, labor, or material on any Mortgaged Property; there is no proceeding pending or threatened or currently occurring for the total or partial condemnation of any Mortgaged Property to the best of PAM's knowledge; each Mortgaged Property is free of substantial damage and is in good repair, except for those items specifically mentioned in the appraisal, or any applicable appraisal review of any mortgaged property. E-1 40 (vii) Each Mortgage Loan at the time it was made, and the origination of such Mortgage Loan, complied in all material respects with all applicable local, state and federal laws and regulations, including, without limitation, the federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act, and other consumer protection laws, usury, equal credit opportunity, disclosure and recording laws. Any Mortgage Loan, and the origination thereof, which is subject to the "high cost or high fee mortgage" provisions of the Home Ownership and Equity Protection Act of 1994, complies with the requirements of such Act. No fraud was committed, nor was any material misrepresentation made, by any Person, including without limitation the related Mortgagor, in connection with the origination of such Mortgage Loan; each Mortgage Loan is a Qualified Mortgage and is a Qualifying Loan. (viii) With respect to each Mortgage Loan, a lender's title insurance policy, issued in standard American Land Title Association or California Land Title Association form by a title insurance company authorized to transact business in the state in which the related Mortgaged Property is situated in an amount at least equal to the Original Principal Amount of such Mortgage Loan insuring the mortgagee's interest under the related Mortgage Loan as the holder of a valid first or second mortgage lien of record on the real property described in the related Mortgage, as the case may be, subject only to exceptions of the character referred to in paragraph (iii) above, was effective on the date of the origination of such Mortgage Loan, and, as of the Cut-Off Date such policy will be valid and thereafter such policy shall continue in full force and effect for the benefit of the Buyer and its assignees, in care of the Master Servicer. (ix) Each Mortgaged Property is improved by a single (one- to four-) family residential dwelling, which may include condominiums and townhouses but shall not include cooperatives; the improvements upon each Mortgaged Property are covered by a valid and existing hazard insurance policy with a generally acceptable carrier that provides for fire and extended coverage representing coverage not less than the least of (A) the outstanding principal balance of the related Mortgage Loan (together, in the case of a Second Mortgage Loan, with the outstanding principal balance of any Senior Liens), (B) the minimum amount required to compensate for damage or loss on a replacement cost basis or (C) the full insurable value of the Mortgaged Property. (x) For all Mortgage Loans, there is in place a fully-paid life of loan flood certification from Pinnacle Data Corporation or another vendor approved by the Buyer, assignable to the Master Servicer, which provides for notification to the Master Servicer of changes in designated flood areas which would affect such Mortgage Loan; in addition, if any Mortgaged Property, as of the Cut-Off Date of the related Mortgage Loan, is in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards, a flood insurance policy in a form meeting the requirements of the current guidelines of the Federal Insurance Administration is in effect for the benefit of the Buyer and its assignees, in care of the Master Servicer, with respect to such Mortgaged Property with a generally acceptable carrier in an amount representing coverage not less than the least of (A) the outstanding principal balance of the related Mortgage Loan (together, in the case of a Second Mortgage Loan, with the outstanding principal balance of any Senior Liens), (B) the minimum amount required to compensate for damage or loss on a replacement cost basis or (C) the maximum amount of insurance that is available under the Flood Disaster Protection Act of 1973. (xi) Each Mortgage and Note is the legal, valid and binding obligation of the maker thereof and is enforceable in accordance with its terms, except only as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general principles E-2 41 of equity (whether considered in a proceeding or action in equity or at law). The maker of such Mortgage and Note had the legal capacity to execute such Mortgage and Note at the time such Mortgage and Note were executed. (xii) PAM has caused and will cause to be performed any and all acts required to be performed to preserve the rights and remedies of the Master Servicer in any Insurance Policies applicable to any Mortgage Loans delivered by PAM, including any necessary notifications of insurers, assignments of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Buyer and its assignees in care of the Master Servicer. (xiii) Interest on each Note is calculated in accordance with the actuarial method; the terms of each Note and each Mortgage have not been impaired, altered or modified in any respect, except by a written instrument which has been recorded, if necessary, to protect the interest of the Buyer and which has been included in the related Mortgage File to be delivered to the Buyer. The substance of any such alteration or modification is reflected on the related Mortgage Loan Schedule and has been approved by the primary mortgage guaranty insurer, if any. (xiv) Except as otherwise required by law or pursuant to the statute under which the related Mortgage Loan was made, the related Note will not be secured by any collateral, pledged account or other security except the lien of the corresponding Mortgage. (xv) No Mortgage Loan will be originated under a buydown plan; no Mortgage Loan provides for negative amortization, has a shared appreciation feature, or other contingent interest feature; and as of the related Cut-Off Date, no Mortgage Loan had a Combined Loan-to-Value- Ratio or a Total Loan-to-Value Ratio in excess of the maximum for the related product type as set forth in Seller's Applicable Guidelines, as amended by the Pool Parameters attached hereto as Exhibit D, unless Buyer acknowledges any such exception(s) through its due diligence, and agrees to purchase the Mortgage Loan based on the exception(s). (xvi) Any advances made after the date of origination of a Mortgage Loan but prior to the Cut-Off Date, have been consolidated with the outstanding principal amount secured by the related Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term reflected on the related Mortgage Loan Schedule. No Note has been modified, except as reflected on the related Mortgage Loan Schedule, and evidence of any modification is in the related Mortgage File and has been supplied to the Buyer. The consolidated principal amount does not exceed the original principal amount of the related Mortgage Loan. No Note permits or obligates the Master Servicer, any sub-servicer or the Buyer or its assignees to make future advances to the related Mortgagor at the option of the Mortgagor. (xvii) Any and all requirements as to completion of any on-site or off-site improvements and as to disbursements of any escrow funds therefor have been complied with, subject to any escrow hold-back for improvements pending completion. All costs, fees and expenses incurred in making, closing or recording the Mortgage Loans were paid. (xviii) To the best of PAM's knowledge, all of the improvements which were included for the purposes of determining the Appraised Value of any Mortgaged Property lie wholly within the boundaries and building restriction lines of such Mortgaged Property, and are stated in the title insurance policy and affirmatively insured; no improvement located on or being part of any Mortgaged Property is in violation of any applicable zoning law or E-3 42 regulation. To the best of PAM's knowledge, all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of each Mortgaged Property and, with respect to the use and occupancy of the same, including, but not limited to, certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities. (xix) With respect to each Mortgage constituting a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in such Mortgage, and no fees or expenses are or will become payable by the Buyer or its assignees under the deed of trust, except in connection with a trustee's sale after default by the related Mortgagor. (xx) With respect to each Second Mortgage Loan, either (A) no consent for such Mortgage Loan was required by the holder of the related Senior Lien prior to the making of such Mortgage Loan or (B) such consent has been obtained and is contained in the related Loan Servicing File. (xxi) Each Mortgage contains a provision for the acceleration of the payment of the unpaid principal balance of the related Mortgage Loan in the event the related Mortgaged Property is sold without the prior consent of the Mortgagee thereunder; each Mortgage contains customary and enforceable provisions which render the rights and remedies of the holder thereof adequate for the realization against the related Mortgaged Property of the benefits of the security, including (A) in the case of a Mortgage designated as a deed of trust, by trustee's sale and (B) otherwise by judicial foreclosure. Subject to any statutory redemption rights of the Mortgagor, upon default by a Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale of, the Mortgaged Property, the holder of the Mortgage Loan will be able to deliver good and marketable title to the Mortgaged Property. To the best of PAM's knowledge, there is no homestead or other exemption available to a Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose on the Mortgaged Property. (xxii) No instrument of release or waiver has been executed in connection with any Mortgage Loan, and no Mortgagor has been released, in whole or in part, except in connection with an assumption agreement which has been approved by the primary mortgage guaranty insurer, if any, and which has been included in the related Funding Package delivered to the Buyer. (xxiii) The maturity date of each Mortgage Loan which is a Second Mortgage Loan is at least twelve (12) months prior to the maturity date of the related first mortgage loan if such first mortgage loan provides for a balloon payment. (xxiv) Each Mortgage Loan has been originated in accordance with all required provisions of Seller's Applicable Guidelines as amended by the Pool Parameters attached hereto as Exhibit D; a full appraisal was performed with respect to each Mortgage Loan in compliance with the applicable requirements set forth in the Applicable Guidelines. (xxv) As of the related Closing Date, to the best knowledge of PAM, there does not exist on any Mortgaged Property any hazardous substances, hazardous wastes or solid wastes, as such terms are defined in the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation and Recovery Act of 1976, or other federal, state or local environmental legislation. E-4 43 (xxvi) Each Mortgage Loan which is a First Mortgage Loan shall be covered by a valid and transferable tax service contract with Transamerica, or other vendors as approved by the Buyer. (xxvii) No mortgage reconveyance, release, satisfaction or trustee fees have been collected by PAM or paid by any Mortgagor. In addition, if there is, in Buyer's reasonable judgment, a documentation problem that would make reconveyance of satisfaction difficult, cumbersome or expensive to the Buyer, then PAM shall at the Buyer's request complete the reconveyance of satisfaction of the Mortgage, including the recordation of the necessary documentation, at PAM's sole cost and expense. (xxviii) The Mortgage Loan is not in default, and all Monthly Payments due prior to the related Cut-Off Date and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents have been paid, to the best knowledge of PAM. PAM has not advanced funds, or induced or solicited any advance of funds by a party other than the Mortgagor directly or indirectly, for the payment of any amount required by the Mortgage Loan. The collection practices used by each entity which has serviced the Mortgage Loan have been in all respects legal, proper, prudent and customary in the mortgage servicing business. With respect to escrow deposits and payments in those instances where such were required, there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made and no escrow deposits or payments or other charges or payments have been capitalized under any Mortgage or the related Mortgage Note. E-5 44 EXHIBIT F FORM OF OPINION __________, 1996 To: The Addresses identified on "Schedule I" attached hereto Ladies and Gentlemen: I am general counsel to PacificAmerica Money Center, Inc., a Delaware corporation ("PAM"), and have acted as such in connection with the execution and delivery of the following agreements: 1. The Amended and Restated Corporate Finance Agreement among PAM, Advanta Mortgage Conduit Services, Inc. ("Advanta Conduit") and Advanta Mortgage Corp. USA ("Advanta Mortgage"), amended as of January 27, 1997 (the "Agreement"); 2. The Master Commitment for Corporate Finance Relationships by and among PAM, Advanta Conduit and Advanta Mortgage dated as of December 16, 1996. 3. The Tri-Party Security Agreement by and among PAM, Advanta Conduit, Advanta Mortgage and Bankers Trust Company of California, N.A., dated as of December 16, 1996. 4. The Mutual Confidentiality Agreement by and among PAM, Advanta Conduit, Advanta Mortgage, dated as of December 16, 1996. The foregoing documents are sometimes collectively referred to below as the "Documents", and any one of them is sometimes referred to below as a "Document". All capitalized terms herein not otherwise defined herein shall have the respective meanings set forth in the Corporate Finance Agreement. In rendering the opinions set forth herein, I have (i) examined executed copies of the Documents; (ii) examined originals or photostatic or certified copies of all such corporate records of PAM and such certificates of public officials, certificates of corporate officers, and other documents, records financial statements and papers and have made such inquiries of officers, employees and representatives of PAM as I have deemed appropriate and necessary as a basis for the opinions hereinafter expressed, and I have further assumed the truth, accuracy and completeness of all information provided to me by such persons; (iii) assumed the genuineness of all signatures (other than those of the officers of PAM affixed to the Documents) and the authenticity of all documents submitted to me as originals and the conformity to original documents of all documents submitted to me as certified or photostatic copies; and (iv) assumed the due execution and delivery, pursuant to the due authorization, of each of the Documents by each of the respective parties (other than PAM) to each such Document. I am qualified to practice law in the State(s) of __________, and I am not expert in and express no opinion as to the laws of other jurisdictions other than the federal law of the United States. In rendering the above opinions, I have assumed that the state law(s) applicable to the 45 Persons on Attached Schedule 1 December __, 1996 Page 2 Documents and under which the same are to be construed is identical in all material respects to the law of the State(s) of __________. Furthermore, the opinions expressed herein do not purport to opine as to applicable state "Blue Sky" laws, legal investment laws, or other state or federal laws pertaining to any securities law issues and securities matters relating to the transactions described in the Documents. Based upon the foregoing, and subject to the other qualifications stated herein, I am of the opinion that: 1. PAM is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 2. PAM has all licenses and qualifications necessary to carry on its lending business as now being conducted and to perform its obligations hereunder; PAM has the power and authority to execute and deliver the Agreement and to perform its obligations in accordance therewith; the execution, delivery and performance of the Agreement (including any Conveyance Agreement and any other instruments of transfer to be delivered pursuant to the Agreement) by PAM and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and do not violate the organization documents of PAM, contravene or violate any law, regulation, injunction, order, decree or other instrument applicable to PAM or to our knowledge, contravene, violate or result in any breach of any provision of, or constitute a default under, or result in the imposition of any lien on any assets of PAM pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which PAM is a party or which purports to be binding upon PAM or any of PAM's assets and which have been identified to us by PAM as "Material Contracts"; this Agreement evidences the valid and binding obligation of PAM enforceable against PAM in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally or the application of equitable principles in any proceeding, whether at law or in equity; 3. To our knowledge, there are no actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency, that are necessary in connection with the execution, delivery or performance by PAM of the Agreement; 4. To our knowledge, there is no action, suit, proceeding or investigation pending or, to the best of PAM's knowledge, threatened against PAM which alleges a widespread practice of violation of any applicable law or regulation with respect to loan origination activities of PAM or any of its subsidiaries, or which would draw into question the validity of the Agreement or the Mortgage Loans or of any action taken or to be taken in connection with the obligations of PAM contemplated herein, or which would be likely to impair the ability of PAM to perform under the terms of the Agreement; 5. To our knowledge, PAM is not in default with respect to any Material Contract or with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would adversely affect its performance hereunder; 46 Persons on Attached Schedule 1 December __, 1996 Page 3 The foregoing opinions are being rendered for the benefit only of the Addressees listed on the attachment and may not be disclosed to, quoted to or relied upon by any other person or entity without the prior written consent of the undersigned. Very truly yours, _________________________________ Title: General Counsel 47 Persons on Attached Schedule 1 December __, 1996 Page 4 SCHEDULE 1 Advanta Mortgage Corp. USA 500 Office Center Drive Suite 400 Fort Washington, PA 19034 Advanta Mortgage Conduit Services, Inc. 16875 West Bernardo Drive San Diego, CA 92127 48 EXHIBIT G FORM OF SYNTHETIC RESIDUAL CERTIFICATE This Synthetic Residual Certificate (this "Certificate") has been issued in accordance with Section 9(d) of the Amended and Restated Corporate Finance Agreement amended as of January 27, 1997 (the "Corporate Finance Agreement") by and among PacificAmerica Money Center, Inc. (the "Seller"), Advanta Mortgage Conduit Services, Inc. (the "Buyer") and Advanta Mortgage Corp. USA (the "Master Servicer"). This Certificate is the Synthetic Residual Certificate referenced in Section 2 of the Tri-Party Security Agreement dated as of ________, 1996 (the "Security Agreement") by and among the Buyer, the Master Servicer (the Buyer and the Master Servicer together are referred to herein as the "Pledgors"), _____________ and Bankers Trust Company of California, N.A., as trustee. Unless otherwise indicated, terms used herein but not defined shall have the respective meanings given to such terms in the Corporate Finance Agreement. This Certificate evidences the secured corporate obligation of the Pledgors to pay the Residual Cashflow amounts to the Seller as required by Section 9(c) of the Corporate Finance Agreement. To secure such obligation, the Pledgors have granted a security interest in the Collateral (as such term is defined in the Security Agreement) to the Seller pursuant to the Security Agreement. This Certificate does not represent any direct ownership interest in any Mortgage Loans. THIS CERTIFIES THAT PacificAmerica Money Center, Inc. is the owner of this Certificate. This Certificate is not transferrable, except to a wholly-owned subsidiary of the Seller. Upon such transfer, the Seller will promptly give notice to the Buyer. IN WITNESS WHEREOF, the Pledgors have caused this Certificate to be signed, manually or in facsimile by it authorized officer. Dated: _______________, 1996 ADVANTA MORTGAGE CONDUIT SERVICES, INC. By:_____________________________ Name: Title: ADVANTA MORTGAGE CORP. USA By:______________________________ Name: Title: G-1 49 EXHIBIT H ________________________________________________________________________________ TRI-PARTY SECURITY AGREEMENT By and Among ADVANTA MORTGAGE CONDUIT SERVICES, INC., ADVANTA MORTGAGE CORP. USA, PACIFICAMERICA MONEY CENTER, INC. and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Trustee Dated as of December 16, 1996 H-1 50 TRI-PARTY SECURITY AGREEMENT This TRI-PARTY SECURITY AGREEMENT (this "Agreement"), dated as of December 16, 1996 by and among ADVANTA MORTGAGE CONDUIT SERVICES, INC. ("Advanta Mortgage Conduit"), ADVANTA MORTGAGE CORP. USA ("Advanta Mortgage Corp.", together with Advanta Mortgage Conduit, the "Pledgors"), PACIFICAMERICA MONEY CENTER, INC. (the "Secured Party") and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as trustee (the "Trustee"). NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereto agree as follows: Section 1. Definitions. In addition to the terms defined elsewhere in this Agreement, the following terms shall have the following meanings when used in this Agreement: "Certificate Account" means the related Certificate Account created under the related Advanta Pooling Agreement. Each Securitization Statement shall more particularly identify the related Certificate Account. "Collateral" means the Pledgors' rights to receive payments of Residual Cashflow in connection with each and every Securitized Loan Pool. "Corporate Finance Agreement" means the Amended and Restated Corporate Finance Agreement amended as of January 27, 1997 by and among the Secured Party, PacificAmerica Money Center, Inc., and the Pledgors, as amended from time to time. "Securitized Loan Pools" means any group of Mortgage Loans sold by the Secured Party pursuant to the Master Commitment and the Corporate Finance Agreement and held by a particular Advanta Trust, whether acquired initially by such Advanta Trust or subsequently acquired through "pre-funded" purchases. A Securitized Loan Pool may represent any number of pools. Capitalized terms used and not otherwise defined herein shall for all purposes of this Agreement have the respective meanings specified therefor in the Corporate Finance Agreement. Section 2. Pledge and Security. Each Pledgor hereby pledges all of its respective right, title, and interest in and to, and grants a first lien on, and security interest in, the Collateral to the Secured Party to secure the obligation of the Pledgors to make payments of Residual Cashflow to the Secured Party in accordance with Section 9(d) of the Corporate Finance Agreement, which obligation is evidenced by the Synthetic Residual Certificate in the form of Exhibit I to the Corporate Finance Agreement. Such financing statement shall be amended in connection with each Securitization transaction to reflect the increase in Collateral. The Seller acknowledges that the Synthetic Residual Certificate is not transferrable except to a wholly owned subsidiary of the Seller. Upon such transfer, the Seller will promptly give written notice to the Buyer. H-1 51 Section 3. Financing Statement. The Pledgors covenant that, on the date of execution of this Agreement, the Pledgors shall cause to be filed a financing statement (Form UCC-1) with the Secretary of State of California to perfect by filing thereof the security interest in the Collateral granted by the Pledgors herein. The Pledgors covenant to file one or more additional financing statements in such other jurisdictions as PacificAmerica Money Center, Inc shall reasonably request. Section 4. Events of Default. Each of the following shall constitute an "Event of Default" hereunder: (a) Failure of the Pledgors to make any payment of Residual Cashflow, owing to the Secured Party under Section 9(d) of the Corporate Finance Agreement, to the Secured Party which failure is not remedied within five Business Days after the due date thereof. Payments of Residual Cash Flow which are not paid on the related Distribution Date shall bear interest at ____ per annum until paid in full. (b) The filing against either Pledgor of a petition for liquidation, reorganization, arrangement or adjudication as a bankrupt or similar relief under the bankruptcy, insolvency or similar laws of the United States or any state or territory thereof or of any foreign jurisdiction as to which such Pledgor fails to secure dismissal within 60 days after such filing. Appointment of a receiver, conservator, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of either Pledgor or of any substantial part of its property, the ordering of the winding-up or liquidation of its affairs, or the entry of a decree or order for relief by a court having jurisdiction in the premises in respect of either Pledgor in any involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect. (c) Commencement by either Pledgor of a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by either Pledgor to the entry of an order for relief in an involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of either Pledgor or of any substantial part of its property, or the making by either Pledgor of any general assignment for the benefit of creditors, or the failure of either Pledgor generally to pay its debts as such debts become due, or the taking of corporate action by either Pledgor in furtherance of any of the foregoing. Section 5. Remedy Upon Default. Upon the happening of one or more Events of Default, the Secured Party shall give at least 5 Business Days written notice to the Trustee, stating the date and the nature of the Event of Default, and identifying the appropriate Advanta Trust relating to the Securitized Loan Pools. The Secured Party shall have the right to direct the Trustee to make all future monthly payments of Residual Cashflow due to it under Section 9(d) of the Corporate Finance Agreement, including amounts owed as of the date of notice, directly from the Certificate Account (or any similar account maintained for the related Securitized Loan Pool), into an account designated by the Secured Party in such notice, before payments may be made to the Pledgors under the terms of the Corporate Finance Agreement. The Trustee shall calculate all amounts owed to the Secured Party to be paid pursuant to this Section 5. The parties acknowledge that the Secured Party shall have no rights against the Collateral, other than the rights of the Secured Party to receive payments as provided for herein and in the Agreement. Notwithstanding the security interest granted hereby, the Synthetic Residual Certificate represents a general corporate liability of the Pledgors. H-2 52 Section 6. Trustee's Duties. (a) The Trustee (i) undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Trustee and (ii) in the absence of bad faith on its part, may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions finished pursuant to and conforming to the requirements of this Agreement. Additionally, the Trustee is permitted to rely and shall be protected in acting or refraining from acting upon any certificates, statement, instrument, opinion, report, request, direction, consent, order, bond, note, notices or other paper or document delivered hereunder believed by it to be genuine and to have been signed or presented by the proper party or parties. (b) No provision of this Agreement shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this subsection shall not be construed to limit the effect of subsection (a) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by an authorized officer of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Secured Party or the Pledgors or relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Agreement. (c) Whether or not therein expressly so provided, every provision of this Agreement relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. (d) No provision of this Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) The Trustee shall be under no obligation to institute any suit, or to take any remedial proceeding under this Agreement, or to take any steps in the execution of the trusts hereby created or in the enforcement of any rights and powers hereunder until it shall be indemnified to its satisfaction against any and all costs and expenses, outlays and counsel fees and other reasonable disbursements and against all liability, except liability which is adjudicated to have resulted from its negligence or willful misconduct, in connection with any action so taken. (f) The Pledgors agree to indemnify the Trustee, and its officers, directors, employees and agents and hold it harmless against, any and all losses, liabilities, damages, claims or expenses (including reasonable legal fees and expenses), that may be imposed on, H-3 53 incurred by or asserted against the Trustee in any way relating to or arising out of this Agreement or any action taken by the Trustee pursuant to this Agreement, unless such liabilities, obligations, losses, expenses, legal fees or disbursements were imposed on, incurred by, or asserted against the Trustee as a result of the Trustee's own negligence or bad faith or willful misconduct. The foregoing indemnification shall survive any termination of this Agreement or the resignation of or removal of the Trustee. Section 7. Notices. All demands, notices and communications relating to this Agreement shall be in writing and shall be deemed to have been duly given when received by the other party or parties at the address shown below, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee. If to the Pledgors: Mark A. Casale Advanta Mortgage Corp. USA 500 Office Center Drive Suite 400 Fort Washington, PA 19034 Telecopy: (215) 444-4743 If to the Secured Party: PacificAmerica Money Center, Inc. 21031 Ventura Blvd. Woodland Hills, CA 91364-2210 Telecopy: 810-358-4639 If to the Trustee: Bankers Trust Company of California, N.A. 3 Park Plaza, 16th Floor Irvine, CA 92714 Telecopy: (714) 253-8289 Section 8. Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. Section 9. Assignment; Successors and Assigns. No party to this Agreement may assign its rights or delegate its obligations under this Agreement without the express written consent of the other parties, except as otherwise set forth in this Agreement. This Agreement shall be binding upon the successors and assigns of the parties hereto. H-4 54 Section 10. Counterparts. For the purpose of facilitating the execution of this Agreement and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original, and together shall constitute and be one and the same instrument. Section 11. Amendment. This Agreement may be amended from time to time by the parties hereto only by a written instrument executed by such parties. Section 12. Governing Law; Agreement Constitutes Security Agreement. This Agreement is intended by the parties hereto to be governed by, and construed in accordance with, California law, without regard to conflict of laws rules applied in California, and to constitute a security agreement within the meaning of the California Uniform Commercial Code. H-5 55 IN WITNESS WHEREOF, the parties have executed this TRI-PARTY SECURITY AGREEMENT as of the day and year first above written. ADVANTA MORTGAGE CONDUIT SERVICES, INC. By:___________________________________________ Name: Title: ADVANTA MORTGAGE CORP. USA By:___________________________________________ Name: Title: PACIFICAMERICA MONEY CENTER, INC. By:___________________________________________ Name: Title: BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Trustee By:___________________________________________ Name: Title: H-6 56 EXHIBIT I MUTUAL CONFIDENTIALITY AGREEMENT THIS CONFIDENTIALITY AGREEMENT ("Agreement") is entered into this 15th day of December, 1996, by and between Advanta Mortgage Corp. USA, 500 Office Center Drive, Suite 400, Fort Washington, PA 19034 ("AMCUSA") and PacificAmerica Money Center, Inc. ("PAM") 21031 Ventura Boulevard, Woodland Hills, CA 91364. WHEREAS, PAM and AMCUSA are contemplating entering into a Master Commitment for Corporate Finance Relationship. WHEREAS, during the course of this arrangement, AMCUSA may give PAM access to, or PAM may learn about various information and material relating to the financial status, marketing strategies, business practices, products, customers, potential customers, procedures, methods, models, materials, technical knowledge and the like of AMCUSA, its affiliates and subsidiaries (the "Confidential Data") all of which AMCUSA considers to be of a proprietary nature and PAM may give AMCUSA access to, or AMCUSA may learn about various information and material relating to the financial status, marketing strategies, business practices, products, customers, potential customers, procedures, methods, models, materials, technical knowledge and the like, which PAM considers to be of a proprietary nature and all of which are referred to herein as "Confidential Data." NOW, THEREFORE, intending to be legally bound hereby, PAM and AMCUSA agree as follows: (1) Each party acknowledges that Confidential Data is considered proprietary and acknowledges that the unauthorized use or disclosure of any Confidential Data could be detrimental to the other party. (2) No party shall distribute, disclose or convey to third parties any Confidential Data without prior written approval of the other Party. (3) Each party agrees that: a. Only employees, with a defined "need to know" basis shall be granted access to any Confidential Data; b. No party shall distribute, disclose or convey Confidential Data to any consultant or subcontractor, except upon prior written approval of the other party; c. Each party shall protect the confidentiality of the Confidential Data of the other party in the same manner in which it protects the confidentiality of its own proprietary and confidential data of like kind. Access to the Confidential Data shall be restricted to those engaged in a use permitted hereby; d. No party shall copy or reproduce any Confidential Data, except as necessary to complete the scope of its work in providing services to the other; I-1 57 e. All Confidential Data made available to each party, including copies thereof, shall be returned upon the earlier of the completion of the scope of work identified above or a request of the other party; f. Nothing is this Agreement shall prohibit or limit the parties use of information (including, but not limited to, financial data and financial strategies and methodologies), (i) previously known to it, (ii) acquired by it from a third party which is not under an obligation not to disclose such information, or (iii) which is or becomes publicly available through no breach of this Agreement; and g. No party shall make use of any of the Confidential Data for its own independent benefit. (4) Each party agrees that, should a third party request it to submit Confidential Data pursuant to a subpoena, summons, search warrant, court or governmental order, the party receiving the subpoena (the "Subpoenaed Party") will notify the other Party promptly upon receipt of such request. If the other party objects to the release of the Confidential Data, the Subpoenaed Party will permit counsel chosen by the other party to represent the Subpoenaed Party in order to resist release of the Confidential Data. The other party will pay the Subpoenaed Party for any reasonable expenses incurred by the Subpoenaed Party in connection with resisting the release of the Confidential Data. (5) PAM shall indemnify AMCUSA with respect to any losses suffered by AMCUSA as a result of a breach of any covenants, promises or representations in this Agreement. The Buyer shall indemnify PAM with respect to any losses suffered by PAM as a result of a breach of any covenants, promises or representations in this Agreement. (6) All the terms, rights, duties and conditions contained in this Agreement shall merge into any future agreement between the parties. (7) This Agreement is binding on the parties and their successors and assigns, and is provisions may be waived or modified by written agreement of the parties. I-2 58 (8) This Agreement is executed and delivered in California, and shall be governed by the laws of the Commonwealth of California. PACIFICAMERICA MONEY CENTER, INC. ADVANTA MORTGAGE CORP. USA By: _______________________________ By: ______________________________ Name: Mark Casale, Vice President of Title: Corporate Finance I-3 EX-11.1 5 EXHIBIT 11.1 1 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE
Three Months Year Ended Ended Dec. 31, 1996 Dec. 31, 1996 ------------- ------------- PRIMARY EARNINGS PER SHARE Income from continuing operations 3,725,000 4,813,000 Interest adjustments (net of tax effect) 55,787 401,887 ------------------------------------------------------------------------------------------------------- Adjusted income from continuing operations 3,780,787 5,214,887 Income from discontinued operations (651,158) (651,158) ------------------------------------------------------------------------------------------------------- Adjusted net income for primary earnings 3,129,629 4,563,729 ======================================================================================================= Weighted average common stock outstanding 1,832,908 1,819,490 Weighted average subscriber warrants 64,210 64,158 Weighted average general partner warrants 554,890 557,599 Weighted average stock options 227,083 226,633 ------------------------------------------------------------------------------------------------------- Weighted average common stock and common stock 2,679,091 2,667,880 equivalents outstanding Adjustment for stock acquired with proceeds (374,030) (374,030) ------------------------------------------------------------------------------------------------------- Adjusted common stock and common stock equivalents outstanding 2,305,061 2,293,850 ======================================================================================================= CONTINUING OPERATIONS $ 1.64 $ 2.27 DISCONTINUED OPERATIONS $ (0.28) $ (0.28) PRIMARY EARNINGS PER SHARE $ 1.36 $ 1.99 FULLY DILUTED EARNINGS PER SHARE Income from continuing operations 3,725,000 4,813,000 Interest adjustments (net of tax effect) 16,503 70,271 ------------------------------------------------------------------------------------------------------- Adjusted income from continuing operations 3,741,503 4,883,271 Income from discontinued operations (651,158) (651,158) ------------------------------------------------------------------------------------------------------- Adjusted net income for fully diluted earnings 3,090,345 4,232,113 ======================================================================================================= Common stock outstanding 1,832,908 1,819,490 Subscriber warrants 64,210 64,158 General partner warrants 554,890 557,599 Stock options 227,083 226,633 ------------------------------------------------------------------------------------------------------- Common stock and common stock equivalents outstanding 2,679,091 2,667,880 Adjustment for stock acquired with proceeds (374,030) (374,030) ------------------------------------------------------------------------------------------------------- Adjusted common stock and common stock equivalents outstanding 2,305,061 2,293,850 ======================================================================================================= CONTINUING OPERATIONS $ 1.62 $ 2.12 DISCONTINUED OPERATIONS $ (0.28) $ (0.28) FULLY DILUTED EARNINGS PER SHARE $ 1.34 $ 1.84
EX-21.1 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 Subsidiaries of the Registrant Pacific Thrift and Loan Company, a California corporation, 100% owned by the Registrant PacificAmerica Money Centers, Inc., a Delaware corporation, 100% owned by the Registrant EX-27 7 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 3,153 237 5,250 0 0 0 0 54,127 2,464 114,934 81,002 745 8,676 2,545 0 0 19 21,947 114,934 11,174 328 0 11,502 4,414 4,966 6,536 1,151 0 28,908 6,471 6,471 (651) 0 4,162 1.99 1.84 7.46 1,394 1,625 357 0 4,229 3,187 271 2,464 2,464 0 0 INCOME ON DISCONTINUED OPERATIONS OF 387 AND LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS OF 1038 ARE SHOWN UNDER EXTRAORDINARY ITEM.
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